Home-ownership: Why it’s never not a good idea
As a father and uncle to growing kids, it is becoming more challenging to provide them with sound advice. A few years back, finding wisdom to pass on was a breeze. Look both ways before crossing the street. Try a bite before you say you hate it. But these days, my nieces and nephews (and likely soon my daughter) love telling me why I’m wrong, so coining the perfect Dad/Uncle-ism that will reverberate throughout the rest of their lives is tricky business. That’s why when it comes to personal finance, I’m thrilled to have an ace in the hole.
“Kids,” I’ll say, when they’re finally ready to receive my sage counsel. “It is never not a good idea to own your own home.” Once their confusion at my strange double-negative sentence construction fades, the power of my words will sink in. Their brows will unfurrow, and they will have to admit that Dad or Uncle is right. Because while this has been accepted knowledge for generations now, I will enjoy the privilege of being the first to outline the reasons to them:
1. Homes are an incredibly safe investment
Home prices are a great bet to increase in value, especially over the long term. US-wide average home prices have grown at an average annual growth rate close to 5% since 1975 (according to the Federal Housing Finance Agency). While that rate of return will not set anyone’s hair on fire, there are few investments you can make that are as reliable as buying your own home. Investing in a property can be particularly secure as a low-risk hedge against inflation. And there are several other financial benefits that come with homeownership.
2. Paying your mortgage is like stuffing your piggy bank
Paying into a mortgage will force these kids to do something that I could not convince, beg or cajole them to do: save money. With every mortgage payment, you build additional equity in your home and increase your personal net worth. Meanwhile, rent payments keep a roof over your head for the next month, but give you nothing further to show for it. Per the US Census Bureau’s most recent data, the median US retiree has a net worth of $200K, but only $60K when excluding home equity! In America, we heavily rely on our homes to be a safety net through our twilight years. And while mortgage payments may initially be larger than the monthly rent for a comparable property, rents will likely rise over time while your mortgage payment will stay the same (for a fixed-rate loan).
3. Owning a home is a business that anyone can manage
Uncle Sam wants people to own their own homes, for many reasons. Studies have shown that homeownership fosters greater ties to one’s community, increases civic engagement, leads to improved physical and psychological health, and may even have positive impact of the educational outcomes of the children who live there. So to incentivize more people to buy homes, the government has long offered significant tax advantages to homeowners, chiefly the annual mortgage interest deduction. That’s far from the only gravy train, as homeowners can also deduct some of the closing costs when purchasing the home, their property tax payments, and any interest paid on home equity credit drawn against the home. On top of that, the primary residence capital gains tax exclusion can save you many thousands of tax dollars if you sell your home and profit from it. And if you ever decide to move out of your home, you can rent out your property and turn it into a monthly cash-generating investment.
“So if owning a home is such a financial no-brainer,” the kids might protest, “why doesn’t everyone own a home?” And they would have a better point than they know, since the US home-ownership rate today is close to the lowest it’s been in the last 50 years. Why are there millions of Americans who don’t own homes, despite the financial benefits from doing so? The fact is that there are structural barriers that shut many people out from buying a home, even though this remains a foundational part of the American Dream. We’ll discuss those barriers here in coming posts.
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I founded Reasi, a home lending startup that brings convenience and cost-efficiency to the home transaction process. If you are buying or selling a home, and want to save money while doing business outside the traditional financial system, Reasi is for you.
Have a question on how blockchain will change the way we fund home purchases, or want to make a suggestion on a future article topic? Please write me at john@reasi.com and I’d be happy to start a conversation. Alternatively, you can follow me on Twitter and LinkedIn.
