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Buying a house with a white picket fence is the American dream. But owning a home is not necessarily a wealth builder.
New research indicates most folks are better off renting a home and investing the savings in stocks and bonds. That’s because gains from stocks and bonds historically exceed gains from property appreciation, according to faculty at three U.S. universities.
These researchers include two of the three people who created the Beracha, Hardin & Johnson Buy vs. Rent Index we detail in “To Buy or Rent? How to Find the Answer to That Million-Dollar Question.”
Their latest research was published in the Journal of Housing Research. Study co-author Ken Johnson, a real estate economist at Florida Atlantic University, explains their findings:
“When considering buying and building wealth through equity appreciation versus renting and reinvesting in a portfolio of stocks and bonds, property appreciation does not change the results. On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds.”
Therein lies the hitch, though: To build wealth, renters must actually reinvest their savings. In other words, renters will only build wealth if they take the money they would have put into buying a home and instead invest it in stocks and bonds, rather than spend it.
As the study puts it, “households that fail to reinvest buy-rent cash flow differentials accumulate less wealth.”
Johnson acknowledges that many renters would spend their savings on consumer goods rather than reinvest it. He describes this as “the least desirable option in terms of building wealth.”
So, folks who would, as renters, be more likely to spend their savings than invest it are generally better off buying a home, the study found. Homeownership would force them to save.
Therefore, Johnson concludes:
“Owning real estate should be sold as a strategy to create [a] better set of risk-adjusted returns rather than create wealth alone.
If you can relate to renters who struggle to save — or if you’ve determined for other reasons that homeownership is best for you — you can save yourself some money by checking out “How to Buy a House — Getting the Best Deal on a Mortgage.”
What are your thoughts on renting versus buying a home and how homeownership impacts wealth? Share them with us by commenting below or over on our Facebook page.