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Homeowners and renters view the economy differently

by xyonent
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Rent Or Own Scaled.jpg

It’s interesting how two people can interpret one image so differently. The same is true for how homeowners and renters perceive the current economy. All the data shows the economy is strong. But the degree of its strength depends on who you ask.

The rent vs buy debate has been going on ever since I started Financial Samurai in 2009, and will likely continue long after I’m gone. My position is that inflation is too powerful a force to combat, so it’s best to buy property as young as possible – you want to ride the inflation wave rather than be crushed by it.

More than 15 years later, I’m even more convinced that for the vast majority of people, homeownership is a better way to build long-term wealth than renting.

Owning a home means you have to keep a close eye on your finances by making monthly mortgage payments. On the other hand, having a fixed mortgage means you have more disposable income over time, giving you more time to save and invest.

When you sell your property, you can bank a tax-free gain of $250,000 if you’re an individual, or $500,000 if you’re a married couple. It doesn’t get any better than that.

Don’t short the real estate market for the long term

Renting long term is the same as shorting the real estate market because you are a price taker. Renters are at the mercy of ever-rising rents. Just like it is not a good idea to short the S&P 500 long term, it is not a good idea to short the real estate market.

While it’s clear that most people would create more wealth by owning rather than renting, there are many who disagree. Why? People always justify their decisionsAs long as there are renters, there will always be people opposed to homeownership.

It doesn’t matter what the data says about how much home prices have risen or how the average net worth of homeowners is far greater than that of renters: once an opportunity is missed, opposition to it becomes the default setting.

It’s like someone who hates Google after they turned them down: Google’s stock price has risen 200% since the rejection, but they still think Google is a terrible company. More profits, more discord.

Wealth creators are not emotional

But one of the keys to becoming a good investor is recognizing when you’re wrong and making better decisions in the future. If you want to build greater wealth, you can’t afford to get too emotional.

If you are living in a rented home and have hopes of becoming a homeowner, keep saving and investing. You may also consider investing in real estate ETFs, REITs, or private real estate funds to increase your exposure in case real estate significantly outperforms other investments.

But to those who are opposed to homeownership and harbor deep-seated resentment towards homeowners, I urge you to reconsider your stance. This post is directed at you.

What’s the economy like? It depends on whether you’re a homeowner or a renter.

If you need another reason to choose to own a home over rent, consider that homeowners tend to have a more optimistic outlook. And the more optimistic you are, the happier you tend to be.

What’s the point of having all the money in the world if you’re not happy? Money is just a means to a better life.

As a renter, you may be frustrated with every rent increase. Ironically, you may hope that rents will go down if the economy goes into a downturn and many people are laid off. After all, you win when others suffer more than you!

On the other hand, if you’re a homeowner, you’re always on the side of economic growth. You want more people to have jobs, more restaurants to open, more schools to increase enrollment. You like local economic drivers that tend to be good for everyone. And when things get bad, you hope people find a way to bounce back.

Doesn’t it seem better to be an optimist than a pessimist? Being a cynic is exhausting, just like a hedge fund manager always looking for what’s wrong so he can make a short sale profit.

The economy is clearly doing well: the stock market is near all-time highs, unemployment is low, wage growth remains strong, and GDP growth remains positive.

However, your perspective on the economic situation may differ depending on whether you’re a homeowner or a renter.

Tenants are under pressure

“The post-pandemic economy treats people very differently, which creates headaches for central banks,” said Geoffrey Roach, the bank’s chief economist. LPL Financial“The experiences of renters and homeowners are very different, and extreme differences are often attributable to living circumstances,” one researcher wrote in a research note.

“Rents have increased by more than 20% since the pandemic began,” Roach noted, “and on average, renters are paying about $370 more per month. As rents continue to rise, so too do feelings of financial insecurity.”

One in five renters (19%) have missed a rent payment in the past year. Federal Reserve Board Report That’s up from 17% in 2022.

And even when income was taken into account, renters were more likely than homeowners to report missing a bill payment in the previous month, and this trend was consistent across a variety of bill types, including water, gas, electricity, phone, internet and cable.

Homeowners are less sensitive to rising interest rates and rising inflation because most have refinanced or don’t have a mortgage. The average American spends about 33% of their income on housing costs. When your biggest costs are fixed or low, rising interest rates and inflation won’t have as much of an impact.

Homeowners feel positive about the economy

Homeowners with mortgages (roughly 60% of all homeowners) could have refinanced at lower interest rates in 2020 and 2021. At the time, Financial Samurai discussed mortgage refinancing extensively, including whether to choose an adjustable-rate mortgage or a 30-year fixed-rate mortgage.

As a result, homeowners save about $220 per month on average, and mortgage payments are a historically low percentage of disposable income, says LPL’s Roach. Saving money feels good. Plus, having a fixed payment gives you financial security.

Meanwhile, the median home price is expected to increase by about 40% between January 1, 2020 and June 1, 2024. According to one study: reportThe 48 million homeowners in the U.S. with mortgages have an average of $206,000 in available equity per borrower, up from $185,000 at the same time last year.

As your monthly mortgage payment goes down and you watch the equity in your home increase naturally, you’ll feel a lot better about your financial situation. And feeling better will make you more optimistic and happier.

Rising home prices, inflation and mortgage refinancing send US wealth soaring

But renters are benefiting from rising stock prices.

The most common argument against homeownership is that renters can save and invest the difference in the stock market, which has historically offered higher returns than real estate (about 10% vs. about 5%), meaning renters have the potential to make more money.

This argument would hold if renters and homeowners invested the same amount of capital in stocks and real estate. However, homeowners typically invest a much larger amount in housing than stock investors invest in stocks, primarily due to leverage.

The median home price in the United States is about $421,000. St. Louis Federal Reserve BankMeanwhile, the median stock portfolio balance for investors in their 30s is well below $100,000.

For users in their 30s EmpowerIn a free finance app where users are more focused on finances, the median stock portfolio is about $150,000.

Additionally, homeowners are 2:1 more likely to own equity than renters. Oxford University Academic ResearchHomeowners have a stock market participation rate of 61.9%, compared to just 25.7% for renters.

So not only are homeowners benefiting from refinancing and rising home prices, but their stock portfolios are also rising in value. In this scenario, it’s hard not to feel more positive about the economy.

The difference between homeowner and renter net worth

According to a study by Oxford Academic, the median net worth of a homeowner is $496,000, while the median net worth of the average renter is just $19,000 – a difference of 26 times. Take a look at the chart above.

Of course, a large portion of the population can’t afford to buy a home even if they wanted to. Housing affordability is an issue due to Federal Reserve policies, and this reality is reflected in the fact that the median income for renters is just $27,500. As a result, there are first-time buyer government assistance programs in place for people who rent and want to buy.

The power of homeownership lies in its passive wealth-building nature. You don’t have to actively manage your investment; you just have to pay the bills, maintain your home, and enjoy living in it. Your home will naturally increase in value over time due to inflation.

New homebuyers will undoubtedly face higher home insurance premiums and mortgage rates: The average monthly mortgage payment today is $2,100, $700 higher than those who bought homes before the pandemic, according to a Federal Reserve survey.

But the vast majority of homeowners are in a much better financial position than they were before the pandemic.

Refinancing has had big benefits for homeowner consumers

Renting is a great temporary solution

Renting is totally fine for the short term. Maybe you’re moving to a new city and trying to figure out which neighborhood you like best. Or maybe your current industry isn’t the right fit for you and you’re considering going back to school. Renting is a great solution.

But if you’re at least 70% sure you’ll be living somewhere for at least five years, I’d recommend buying — but don’t get caught up in a bidding war. Be strategic about when and how much you buy.

The next time someone tells you that renting is a better way to build wealth, understand their perspective. Are they a renter or a homeowner? For how long? How do they make and invest their money? Are they a stable person?

Sure, financial experts might advise you that homeownership is not an effective way to build wealth, but if this “money guru” has been living in a rental home for the last 20 years and has made millions as a professional marketer selling financial courses, you might want to take their advice with a pinch of salt. They’re already making a pretty penny and can afford to live in a rental home.

In 20 years, your kids will be amazed at how cheap real estate prices are today. If you’re not going to buy real estate to build your own fortune, at least buy it for your kids. That way, they won’t be shaking their fists at the sky because they can’t afford to buy real estate in the future.

Questions from readers

Do you rent or own your home? How do you view the current economy? Are people who rent more pessimistic and cynical about the economy than people who own their own homes? Why do you think there are still so many people who are vehemently opposed to home ownership? Are you going to tell your kids to continue renting forever?

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Invest in real estate without a mortgage

Investing in private real estate funds allows you to invest in property without taking out a mortgage. Fundriseis a leading private real estate investment firm with over $3.3 billion in assets under management with a minimum investment of just $10. The firm focuses on residential and industrial real estate in the Sunbelt region, known for its low valuations and high yields.

Personally, I have allocated $954,000 to a private real estate fund primarily targeting properties in the Sunbelt, a region that is seeing a rise in investments in lower-cost parts of the country as remote work becomes more prevalent.

Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

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