New Study: Homeownership Creates Family Wealth

Matthew Rognlie, from the Department of Economics at MIT, recently released a paper:Deciphering the Fall and Rise in the Net Capital Share. One of the major findings of the report is that homeownership is and has been for the last fifty years a major component to family wealth.

An article on the study in The Economist notes one of the findings of the study:

“The return on non-housing wealth, in fact, has been remarkably stable since 1970. Instead, surging house prices are almost entirely responsible for growing returns on capital.”

This came as no surprise to us as the Federal Reserve previously reported that the net worth of families that own their own home is 36 times greater than that of families that rent.

I have personally seen this proven over and over again.  Think about it like this.  Someone buys a home, even with a low 3 1/2% down payment.  They make payments on the property and according to historical data, values increase on average by 5% per year.  Let’s do some math.

$450,000 purchase price.  At a simple 5% increase per year that would be an increase of $22,500 per year on average.  With our spending habits in the United States, most people don’t manage to save $22,500 per year or every have that amount in their bank account ever.  Also depending on what report you read, the average household has no more than a couple thousand dollars in the bank at any given time.

So by being a home owner you build your wealth by default.  I work with families all the time who’s parents bought a house in 1964 for $30,000 and the kids are now selling it for $900,000 free and clear.  Yet not a single one of those kids came into the deal with $900,000 in their pocket.

And only because I know someone will bring this up, yes I realize that markets crash in cycles but in my opinion, you buy real estate and hold it for the long term.  In the end you’ll always win by owning.  If you rent you’ll never have that chance of leveraging wealth.

Bottom Line

HousingWire’s Senior Financial Reporter, Trey Garrison, summed it up well in hisreporting on Rognlie’s study:

“Homeownership has consistently created generational wealth more reliably, and more ‘democratically’, than any other asset class. And it does so in a manner entirely ancillary to its primary purpose of giving you a place to lay your head and keep your stuff.”