Tag Archives: Wealth

Housing Wealth: The Missing Piece of the Affordability Equation

Housing Wealth: The Missing Piece of the Affordability Equation | MyKCM

The real estate market is soaring today. Residential home values are rising, and that’s a big win for homeowners. In 2020, there was a double-digit increase in home values – a trend that’s expected to head toward similar levels this year.

However, skyrocketing prices are causing some to start questioning affordability in the current housing market. Many are quick to emphasize the fact that homes today are less affordable than they were last year. Black Knight, a leading provider of data and analytics across the homeownership life cycle, just reported on the issue.

The findings show the historical averages of the national payment to income ratio, which they define as “the share of the median income needed to make the monthly payments on the median-priced home.” Their study reveals:

  • The average over the last 25 years was 23.6%
  • The average over the last 5 years was 20.1%
  • The average today stands at 20.5%

Right now, housing payments are slightly less affordable than the five-year average – but only by less than ½ a percentage point. However, they’re significantly more affordable than the 25-year average. Put another way, a buyer will likely make a slightly greater financial sacrifice to afford a home right now than if they purchased a home within the last five years. On the other hand, it also means the potential financial sacrifice is not nearly as great as it was over the last 25 years.

Does making a sacrifice to buy a home today make financial sense in the long term?

Last week, the Federal Reserve announced that, in the first three months of the year, household net worth increased by $968 billion based solely on the values of the real estate they owned. Another report from CoreLogic reveals the average annual gain in homeowner equity was $33,400 per borrower.

Housing Wealth: The Missing Piece of the Affordability Equation | MyKCM

Homeownership continues to be the cornerstone to building personal wealth. For most Americans, their home is the largest asset they own. On top of that, the difference between the net worth of homeowners and renters is significant at every income level. Here’s a table detailing that point using data from a study done by First American:Owning a home is an essential steppingstone to grow a household’s net worth. Despite the slightly greater sacrifice in the percentage of monthly income you’ll spend on housing today, for most homebuyers, the payoff of starting to build equity now will be worth it.

Bottom Line

Since prices have risen dramatically over the past 18 months, it’s slightly less affordable to buy a home today than it was a year ago. However, when you consider the equity gain and weigh the long-term benefits of building your net worth, you may question if you can afford not to buy now.

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Homeownership Is Full of Financial Benefits

Homeownership Is Full of Financial Benefits | MyKCM

Fannie Mae survey recently revealed some of the most highly-rated benefits of homeownership, which continue to be key drivers in today’s power-packed housing market. Here are the top four financial benefits of owning a home according to consumer respondents:

  • 88% – a better chance of saving for retirement
  • 87% – the best investment plan
  • 85% – the chance to be better off financially
  • 85% – the chance to build up wealth

Additional financial advantages of homeownership included in the survey are having the best overall tax situation and being able to live within your budget.

Does homeownership actually give you a better chance to build wealth?

No one can question a person’s unique feelings about the importance of homeownership. However, it’s fair to ask if the numbers justify homeownership as a financial asset.

Last fall, the Federal Reserve released the Survey of Consumer Finances, a report done every three years, with the latest edition covering through 2019. Their findings confirmed that homeownership is a clear financial benefit. The survey found that homeowners have forty times higher net worth than renters ($255,000 for homeowners compared to $6,300 for renters).

Homeownership Is Full of Financial Benefits | MyKCM

The difference in net worth between homeowners and renters has continued to grow. Here’s a graph showing the results of the last four Fed surveys:The above graph only includes data through 2019, but according to CoreLogic, the equity held by homeowners grew by $26,300 over the last twelve months alone. That means the gap between the net worth of homeowners and renters has probably widened even further over the last year.

Homeownership Is Full of Financial Benefits | MyKCM

Some might argue the difference in net worth may be due to homeowners normally having larger incomes than renters and therefore the ability to save more money. However, a study by First American shows homeowners have greater net worth than renters regardless of their income level. Here are the findings:Others may think homeowners are older and that’s why they have a greater net worth. However, a Joint Center for Housing Studies of Harvard University report on homeowners and renters over the age of 65 reveals:

“The ability to build equity puts homeowners far ahead of renters in terms of household wealth…the median owner age 65 and over had home equity of $143,500 and net wealth of $319,200. By comparison, the net wealth of the same-age renter was just $6,700.”

Homeowners 65 and older have 47.6 times greater net worth than renters.

Bottom Line

The idea of homeownership as a direct way to build your net worth has met the test of time. Let’s connect if you’re ready to take steps toward becoming a homeowner.

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