It's drilled into us from an early age: Buying a home is the first big step to building wealth. But is this version of fulfilling the American Dream always the best move?
Not necessarily. It's true that homeowners on average have more money than renters, but typically it's not the houses that made them rich. If your main goal is building wealth, it's better, on average, to rent a home than to buy one, according to a recent study by faculty at Florida Atlantic University, Florida International University, and the University of Wyoming.
Homeowners in all 50 states and Washington, D.C., pay more for housing each month than renters who live in the same areas — 33 percent to 93 percent more, depending on where you live, according to a 2017 NerdWallet analysis. If you choose a lease over a deed, you pay rent and utilities. Done. But if you buy, you've got the same utilities, plus mortgage payments, insurance, and real estate taxes. On top of that, you might have homeowner association dues, bills for any repairs you can't do yourself, painting, landscaping, and the occasional whopper expense such as a new roof or HVAC unit.
As usual, however, there's a catch: Renters only translate those savings into greater wealth if they are disciplined enough to always invest the extra cash. Homeowners are slowly paying down their mortgages, and seeing the value of their property creep up. Renters can make their money grow faster, provided they religiously invest the 20 percent they would have plunked down as a down payment, along with any monthly savings, in a portfolio of stocks and bonds, the researchers said.
"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," said study co-author Ken Johnson, PhD, real estate economist at FAU's College of Business and co-developer of the Beracha, Hardin and Johnson Buy vs. Rent Index.
Of course, not everybody is going to be disciplined enough to resist the temptation to take the extra money and splurge on a vacation or a shopping spree. You can't skip your mortgage payment, though, so every month you're forced to pay down a little of your mortgage principal, until one day the house is yours, free and clear. So for many or even most of those who can afford it, buying is still the safer bet to balance the need for financial security with the goal of increasing wealth.
"The American Dream is alive and well but in need of revision," Johnson said. "To that end, we suggest not all but most should own rather than rent due to ownership's embedded commitment to save. Owning real estate should be sold as a strategy to create better set of risk-adjusted returns rather than create wealth alone."
There are other considerations, though. Stress, for example. It's a lot easier to ignore the drip-drip-drip of a leaky roof if you're not the one who has to pay for a new one. So if you already have enough headaches, you have another reason to think twice about buying. A large mortgage or loan ranked at No. 20 on the Holmes and Rahe Stress Scale, a landmark stress study that looked at the top stress-inducing elements in life that was conducted in 1970.
"If someone has recently made other life changes such as marriage, which is No. 7, switching careers (No. 18) or having a child (No. 14), it might be wise to postpone buying a home," Tim Lucas, editor-in-chief of mymortgageinsider.com, told U.S. News & World Report. "Stress overload can lead to missed payments, which can result in destroyed credit or even losing the home. It's better to rent if your life is in flux, and then buy when your stress levels are lower."
And if you're young and don't yet know where life is going to take you, buying might not make sense. If you pick up stakes to take on a new job two years down the line, you can end up losing money on a home purchase if prices are flat and you still have to pay a real-estate commission when you move.
In other words, if you're already dealing with lots of stress, simply trying to keep your options open, or if you're aiming to build wealth and know you have the discipline to invest regularly, signing a lease might be your version of the American Dream, at least for now.