Why Homeowners Are 40x Wealthier Than Renters
Homeownership plays a crucial role in building personal wealth and maintaining a strong middle class. The financial advantages of owning a home go beyond just having a place to live—it directly impacts your net worth. With rising inflation and ongoing government spending, the gap between homeowners and renters continues to widen. This article outlines the key ways homeownership helps build wealth, from property appreciation and principal reduction to tax savings and fixed-rate mortgages. Understanding these principles can give you an edge in securing your financial future and taking advantage of long-term stability.
Homeowner vs Renter Wealth Gap is Growing
You’ve probably heard about the wealth gap between homeowners and renters in this country. But how big is this gap? How has it changed recently, and why do homeowners generate so much more wealth?
The most recent data we have is from a 2022 census, which shows that homeowners had a median net worth 40 times greater than that of renters—$396,200 compared to just $10,400. The average gap is even larger, with homeowners having $1.37 million versus $56,000 for renters, though this is skewed by billionaires inflating the numbers. The median number, which is what really matters here, shows a 40x difference. And that number keeps growing. Over the past 33 years, the median wealth gap between homeowners and renters has increased by 70%.
The average wealth gap has grown even more, rising 250% due to inflation and the increasing wealth created over time. Clearly, homeownership plays a huge role in the net worth difference between homeowners and renters.
How Homeowners Build Wealth
So, how do homeowners build so much more wealth? Is it because they’re better savers or have higher salaries? The real reason is homeownership itself. There are four key principles that help generate wealth through owning real estate.
1. Appreciation
The first is appreciation. Not only do homes appreciate, but with a mortgage, it's leveraged appreciation. This is what sets real estate apart from other investments, like stocks. For instance, if your home appreciates at an average inflation rate of 5%, you're not just earning 5% on the money you put in. If you put down 5% on a $200,000 home, that’s $10,000. If the home’s value goes up 5%, it’s now worth $210,000, meaning your equity increased by $10,000. Since you only invested $10,000 to begin with, your money has effectively doubled. This is a major advantage of real estate. In this scenario, the bank is like a business partner. The bank may cover 95% of the home’s cost, but it doesn’t claim any of the appreciation—it only wants the monthly interest payments. As the homeowner or investor, you get to keep 100% of the appreciation, which is unlike any other type of investment.
2. Principal Reduction
The second main way to build wealth through homeownership is through principal reduction. Each mortgage payment has two key parts: one goes toward paying the bank the interest on the loan, and the other goes toward reducing the principal, which is the actual loan balance. Over time, this pays off the home—whether it's over 15 years for a 15-year loan or 30 years for a 30-year loan. Principal reduction is equity you can access when you sell the home, or you can tap into it through a home equity line of credit. This is one of the major differences between owning and renting: a portion of your monthly payment builds your equity, whereas rent payments go directly into the landlord's pocket.
3. Tax Savings
The third component is tax savings. Now, I'm not a tax accountant, so you should consult with your tax advisor, but many homeowners can reduce their taxable income with homeownership tax benefits. The first is the mortgage interest deduction, and the second is the ability to deduct most of your closing costs in the year you purchase the home. These deductions can lower the overall cost of owning a home and reduce your monthly expenses. This is in sharp contrast to renting, where payments to your landlord don’t offer any return. With homeownership, some of what you pay may come back in the form of a tax refund at the end of the year.
The government offers these incentives because they want you to borrow money. We are a debtor nation, and for banks to create more funds, they need you to borrow. This is why they provide tax incentives. Additionally, if you own rental properties, the government gives tax benefits to encourage private landlords to provide better housing—because the government doesn't manage housing well itself.
4. Fixed-Rate Mortgage
The fourth way to build wealth through homeownership is by locking in a fixed-rate mortgage. This keeps your mortgage payments consistent, except for potential increases in insurance or taxes. Rent, on the other hand, tends to rise year after year.
These increasing rent costs can add up. On average, homeowners spend about 17% of their income on housing, while renters are now spending closer to 30%. This 13% difference allows homeowners to save and invest in other areas, such as buying additional real estate, investing in stocks, purchasing precious metals, or even enjoying life with a vacation. This fixed housing cost is another key factor that helps homeowners build more wealth over time compared to renters, who face ever-increasing housing costs.
The Importance of Owning a Home
Why is all this so important? Our country has always relied on a strong middle class, but there’s a growing gap between those who own assets and those who don’t. You don’t want to find yourself on the wrong side of that divide. Even though inflation seems to be stabilizing as of this recording, it’s unlikely to stay that way with the government’s ongoing deficit spending but that's a topic for another video.
One of the things that has made our country strong is its middle class. Owning a home also provides simple but significant advantages, like having a backyard for kids to play in and creating a great family environment. Beyond the personal benefits, homeownership brings pride and often leads to higher community involvement, which improves the community for everyone.
Are you ready to start building wealth through homeownership? Contact us for a free homebuyer consultation today at 256-333-MOVE or contacts us here.
Posted by Matt Curtis on
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