The idea of a home as an investment has been so ingrained in American culture that it’s difficult to conceptualize it and the American Dream in any other way. And yet we do not expect most other large, utilitarian purchases to increase in value as we use them: not our cars, our appliances nor our furniture. And if recent reports are accurate, we might be moving away from doing so with our housing.
The collapse of the housing market in 2008 can be largely credited with this shift. It was the expectation of ever-increasing value that led to the initial bubble in the market, and which often puts homeownership out of reach for low- and moderate-income families. But for those same families, a house can be a gateway to financial security as they build equity and assets that can launch them into the middle class.
So is housing a good opportunity to build wealth? Wenli Li and Fang Yang, in a paper for the Federal Reserve Bank of Philadelphia, provide evidence that it might not be. Their research found that the average real rate of return on housing actually falls below zero for the average homeowner, particularly for low-income borrowers who put little money down and take longer to build equity.
However, Jordan Rappaport at the Federal Reserve Bank of Kansas City took a different approach to weighing the investment potential of home ownership. The paper compared the wealth homeowners build through equity to wealth which could have been accumulated by renting an identical home and investing the comparable savings in the stock market. The results were mixed, demonstrating that renting plus investing can be as effective at helping families build wealth as home ownership is, and that it largely depends on the markets at the time of purchase.
All this is to say that home ownership continues to be a valuable way to save and build wealth for some families, but for many renting can be equally or more beneficial – at least in strictly economic terms. Which is all the more reason to continue to pursue a balanced housing policy.