Did you know that owning a home is a wealth generator for many Americans? According to 2023 research by National Association of Realtors® (NAR) economists, “A typical homeowner’s net worth is 40 times higher than that of a renter.” Indeed, real estate is both a great financial investment, in addition to being a great investment in one’s quality of life.
So, if you plan to stay in an area for more than a short period of time and can get a loan, buying a home is almost always a good idea—in any market. After all, whether it’s a mortgage or rent, you will have a monthly payment. Nonetheless, many buyers are holding off until the market “improves.” If you’re one of these buyers, you could lose the opportunities available today and find yourself sitting on the sidelines for a lifetime.
The 2021 NAR report Housing is Critical Infrastructure: Social and Economic Benefits of Building More Housing noted that the level of home construction has lagged below historic levels for two decades, creating the serious housing shortage we have today. To bring housing supply back in balance with demand, NAR maintains that construction would need to rise to 1.5 times the historic average. But that may be difficult with high interest rates and potential economic challenges, such as recessions. As a result, it could be decades before housing supply and demand balance. While no one can discount the possibility of prices dipping at some point, prices are likely to continue rising over the long haul. So despite high interest rates and short supply, buying a home still has many benefits. Consider just a few:
Homeowners have greater control of monthly costs than renters. Sometimes—but not always—initial monthly mortgage payments are higher than prevailing rental rates, but it is unlikely to remain that way. Over time, taxes and insurance will likely go up, but the monthly payment on a fixed-rate mortgage will stay fixed for its entire life. (Even though the payment is fixed, the portion of the payment toward interest will decrease each month, and the amount applied to principal will increase.)
And if interest rates go down, owners can refinance, which can greatly reduce their monthly costs. Homeowners also can deduct the mortgage interest they pay on their annual federal tax return, which makes the home more affordable than it appears on the surface. In contrast, landlords tend to increase rents to cover costs, plus inflation. Ultimately, renters can easily pay more in monthly payments over time than long-term homeowners. If renters want to reduce monthly costs, that usually means finding a less-expensive rental—one that is perhaps smaller, lower quality, or farther way from a desired location.
Owners get equity plus appreciation as they pay down the loan. Since housing prices are very likely to rise over time, owners will also earn equity as the market changes. The only time an owner loses equity is when they sell in a down market, which they can avoid by waiting until the market improves. If owners must move during a down market, they also can rent the property and have their tenants pay down the mortgage until the market improves. Meanwhile, as noted, increased home value is the most likely long-term trend for housing.
Owners have it their way! Owning a home is more than just an investment, it can vastly improve quality of life. Home ownership gives owners control over their own personal environments—from wall colors and plants in the garden to the kitchen and bathroom design. Owners don’t need to ask a landlord for permission. And while regular maintenance is necessary, owners don’t have to beg a landlord to fix things when they break. Remember, repairs in a rental are not “free” for the renter, since landlords eventually pass along costs through rent increases. Homeowners are in the driver’s seat and have options to control and manage costs. Those who don’t want to be bothered with roofs and yard maintenance can buy condos or cooperative properties, where an association or management company performs most maintenance. For those still concerned about unexpected costs, home warranties also provide some security, particularly for items with large price tags.
Ultimately, it is impossible to “time” the market, and anyone suggesting they can predict where future prices and inflation will go, really does not know. Of course, anyone can look at trends, particularly in the short term, that can give an idea of the direction in which the market is moving. However, property ownership, for the most part, is a long-term proposition. Owners willing and able to purchase property can realize many long-term benefits. Perhaps the most important one is the ability to leverage the entire value of a property from the start, even though early ownership with a mortgage might have the buyer investing in just 20 percent of the value. When values appreciate, it’s the entire value of the asset that increases, not just the amount the buyer has invested to that point. Renters, however, get to pay for the privilege of living in a residence without the benefit of long-term asset improvement.
