The Homeowner’s Dilemma
Homeownership can be the best financial decision you ever make — but also one of the most frustrating experiences of your life. It doesn’t have to be this way.
By Nicholas Stewart & Cara Eckholm
Homeownership has long been a cornerstone of the American dream. A home is the largest purchase that most Americans make, and most Americans rank owning a home as the ultimate sign of prosperity — even above a successful career, raising a family, or earning a college degree.
Homeownership is still the primary vehicle for wealth accumulation in the United States, particularly for lower- and middle-income earners, as reported in a recent Brookings study.
There are four primary reasons why homeownership is tied to wealth.
1. Home price appreciation: Home values tend to rise over time, especially in major cities like San Jose, which has seen home prices increase more than 100% in the past ten years. This is in marked contrast to other capital-intensive assets, like cars, which usually depreciate with age. Renters, in contrast, pay their landlord each month, without any return on their investments.
2. Favorable tax policy: Since the early-20th century, the federal government has offered a range of tax incentives to homeowners — most prominently the Mortgage Interest Deduction, which allows homeowners to deduct the monthly interest they pay on their home from federal taxes. For scale: in 2015, the federal government effectively granted homeowners $134 billion through tax incentives, an amount larger than the entire budgets of the Departments of Education, Justice, and Energy combined that year, according to The New York Times. Renters, by contrast, cannot deduct their monthly rent payments.
3. Borrowing against home equity: For anything that requires cash upfront — like starting a new business — homeowners can borrow against the home equity they have accumulated. Home equity loans and home equity lines of credit (HELOC) are typically offered at much lower interest rates than credit cards, as they are secured by a real asset: one’s home. Advantageous lending products like HELOCs give homeowners significant financial flexibility.
4. Financial stability: Homeownership can provide insulation from the volatility of the rental market, which, coming out of the pandemic, has seen extreme inflation in many major U.S. cities. Plus, some Americans report that the predictable housing costs associated with mortgage payments make it easier to plan ahead and save for retirement.
If owning a home is great, why is buying one so terrible?
For something that constitutes such a big and important financial investment, home buying is a remarkably bad user experience. As anyone who has bought a home can tell you, the process is painful and costly. Why?
1. You’re looking for something that just doesn’t exist in your budget. The core reason why buying a home is so hard is limited inventory. The Bay Area alone is projected to need 450,000 more homes by 2030 for supply to catch up with demand. That’s the equivalent of building new housing for roughly half the population of San Francisco in less than ten years. The situation in the Bay is emblematic of major metro areas across the country: for years, cities have been growing yet underbuilding. The consequence? Supply is limited, so prices are higher. The average American must save for 25 years in order to afford a median-priced home, and save for 40 years in areas like the Bay. The process of searching for a home is dominated by sticker-shock and compromises, as buyers come to terms with the sub-par options available in their price range.
2. You’re navigating an overly complex process. Buyers must navigate a web of documents, disclosures, and decisions, with lots of false starts as they compete against others for a home. From combing through Department of Real Estate documents to scheduling inspections, the process can feel overwhelming. If you’re a first-time homebuyer, you’re navigating this dizzying maze for the first time. Plus, it takes the average homebuyer about 6 months to a year to buy a home — a long time to be taking on what can often feel like a full-time job.
3. You have to interact with middlemen, who add cost. Buyers often encounter a web of third parties in their process of home buying, like sales agents, lawyers, and inspectors. All of these services come at a cost, even if it may be hidden to the buyer. On average, the purchase process costs 2–5% of the home value. So, if you buy a house for $1.8M — the average price of a single family home in Santa Clara County in Q1 of 2022—somewhere between $36k-$90k of that purchase price is going to middlemen.
4. Increasingly, you’re competing against financial institutions. In recent years, financial firms have expanded their footprint in residential real estate. One analysis of sales across 40 American cities last year showed that these firms bought 15 percent of all homes sold in those cities; another found a six percent increase year-over-year in the percent of home purchases that investors made. When entering the home buying process, homebuyers are going head-to-head against sophisticated financial firms that have capital to deploy.
The Big Picture
In short, many Americans find themselves in a frustrating and challenging position: homeownership feels essential to wealth building in the United States, but the barriers to entry feel increasingly insurmountable. We started Nabr to put more people on a path to owning a home they love in a city they love. Read more of our posts to learn about home buying today — and how Nabr is doing things differently.
Check our next post: “How is buying a traditional home different from buying a Nabr home?
