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Q: Effects of Home Ownership on Personal Wealth ( Answered 5 out of 5 stars,   4 Comments )
Subject: Effects of Home Ownership on Personal Wealth
Category: Business and Money > Economics
Asked by: sam_lee_ca-ga
List Price: $20.00
Posted: 24 Jul 2006 13:14 PDT
Expires: 23 Aug 2006 13:14 PDT
Question ID: 749117
I have heard that owning a home makes a big difference in family
wealth.  That people who own homes are richer and their children are
richer than those who rent.  Please find 3 citeable primary sources
that support this concept if possible.
Subject: Re: Effects of Home Ownership on Personal Wealth
Answered By: gregaw-ga on 24 Jul 2006 13:39 PDT
Rated:5 out of 5 stars
1. Source: Federal Reserve Board
Home ownership builds wealth.  The median net worth of most
modest-income owners is almost $60,000 compared to less than $10,000
for renters in the same income group.  The Federal Reserve Board ?
Survey of Consumer Finance.

2. Source: HUD (US Department of House and Urban Development)
"Median net wealth for homeowners exceeds $78,400, while renters
accumulate less than $2,300, or 3 percent of this amount."

3. Source: NATIONAL ASSOCIATION OF REALTORS® - National Center for
Real Estate Research, Nov. 2004$FILE/Housing%20Wealth%20Effects%20final.pdf
"Among homeowners with under$20,000 in income, three quarters have
more home equity than stock equity. Meanwhile, the median wealth of
these low income owners is 81 times greater than the median wealth of
renters with comparable incomes."

There are several articles at this site that may help as well.

If you require any additional information please post a request for clarification.

sam_lee_ca-ga rated this answer:5 out of 5 stars and gave an additional tip of: $3.00
On point.  Thanks.

Subject: Re: Effects of Home Ownership on Personal Wealth
From: jack_of_few_trades-ga on 24 Jul 2006 14:00 PDT
I have also been very interested in this topic.

I'll first point out that all of the sites above are very flawed if
you're looking at a home as a source of net worth.  The sites show
average wealth, but do not show that the home created more wealth than
an equal investment in the stock market would have.

I have done the math and it surprised me a bit.  Even in your own home
(where you get the nice tax breaks), the long term benefit of owning
verses renting is negative using [what I researched as] reasonable
expectations of the stock market (11%) and home appreciation (5%) and
rent increases (4%).  If you invest the money wisely using tax
advantaged accounts then you will come out ahead in the market than by
buying.  The trick is that most people don't invest the difference in
what they would have spent for the house vs renting... instead they
spend it needlessly.
I guessed that the above was true, but what did surprise me was that
in the short run (5 to 10 years), buying a house is likely more
beneficial than investing.  The critical eliment that I didn't
consider before is that in the short run, the house is bought almost
entirely with the banks money (a very large margin purchase).  This
greatly increases the risk of your investment (if the house value
doesn't rise then you lose alot of money), but you have a much greater
investment that grows than you would have if you only used your money.
 But by the time you've had the house 20-30 years, the opportunity
cost (investing aggressively in tax advantaged accounts) outweighs the
benefits of buying the house.

Also consider that you would buy a more expensive house than you would
rent.  In the DC area, cheap houses are going for $400,000... that is
about $2500 mortgage.  Cheap rentals are going for about $1500.  That
is $1000 per month that you are spending extra, and most of that is
interest, not payment on the principle.
Subject: Re: Effects of Home Ownership on Personal Wealth
From: pinkfreud-ga on 24 Jul 2006 14:39 PDT
>> ...people who own homes are richer...than those who rent.

I don't find this surprising, in view of the fact that a certain
amount of personal wealth is generally required in order for a person
to be able to buy a home. I'd imagine it is also true that people who
own Rolls Royces are richer than those who ride the bus. That doesn't
meant that owning a Rolls Royce leads to wealth.
Subject: Re: Effects of Home Ownership on Personal Wealth
From: myoarin-ga on 24 Jul 2006 19:44 PDT
Pink is right, the richer own their houses because they are richer. 
Purchasing a house does not make one richer.

Jack has brought up the important fact that all the financial
calculations showing that renting and investing the difference
optimable are pure theory.
Paying off a mortgage is a form of saving: one is increasing his equity.

Also, as mentioned:  If house costs are increasing 5% pa, and one has
a 20% down payment, after five years, one may have repaid 5% of the
principal of a 30 yr mortgage, so he has 25% equity in the house,
which has now increase 25+% in value, and that is all the owner's if
he sells, approximately doubling his investment.
Subject: Re: Effects of Home Ownership on Personal Wealth
From: sam_lee_ca-ga on 26 Jul 2006 21:46 PDT
My question was partially prompted by the artificial life models that
I have seen over the last 20 years.  Qualitatively I have seen that
the models show that parental life with greater assets have offspring
with higher assets compared to other AI life that are offspring of
poorer parents.

Just an FYI.

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