How Do Homeowners Accumulate Wealth?

The differences between buying and renting are massive. According to the Federal Reserve, a typical homeowner’s net worth was $195,400, while that of renter’s was $5,400. The data reflects 2013 and the next survey of household finances, which is conducted every three years, will be out in 2016. Based on what has happened since 2013 and projecting a conservative assumption of what could happen next year to home prices if we see only 3% price growth, the wealth gap between homeowners and renters will widen even further. The Fed is likely to show a figure of $225,000 to $230,000 in median net worth for homeowners in 2016 and around $5,000 for renters. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale.

Though there will always be discussion about whether to buy or rent, or whether the stock market offers a bigger return than real estate, the reality is that homeowners steadily build wealth. The simplest math shouldn’t be overlooked. A vast majority of homebuyers take out a 30-year fixed rate mortgage to make a home purchase. After 30 years, there is no mortgage payment (nor rent payment). So the home price growth over that time period would be the equity that the homebuyer would have accumulated. For example, the median home price of a single-family dwelling in the U.S. thirty years ago in 1985 was $75,500. This year, it will be at least $220,000. That figure of $220,000 is the housing component of the person’s wealth. Even had home prices not risen, the person would still have $75,500 in wealth today – on top of not paying any further monthly mortgage after 30 years.

This simple example does not play out nearly as neatly in the real world, since people do not stay in one residence over the 30 year period. Almost all homeowners trade up, change neighborhoods, or move to a better school district at some point. However, they are able to make those residential relocations due to the housing equity accumulated, even over a shorter period, and can immediately apply that equity to the next home as a downpayment. Therefore the conditions of steadily building housing wealth still hold.

We also know that not everyone can or should be homeowners. The memories of easily accessible subprime mortgages and subsequent harsh foreclosure pains are still fresh, and remind us of the devastating impact on the families involved, local communities, and to the broad economy. In addition most young adults have not developed the financial standing or have found a stable, desirable career and, therefore, choose not be homeowners until later. The homeownership rate among households under the age of 35 is 35% currently and rarely rises above 40% historically. For those under the age of 25, the current ownership rate is 23% and rarely rises above 25%. But the time will eventually come when people want to convert to ownership. By the time people are in their prime-earning years of 45-to-55, nearly three-fourths do eventually become homeowners. By retirement, nearly 80% are homeowners.
A recent survey of consumers commissioned by my organization revealed that 80% believe that purchasing a home is a good financial decision (2015 National Housing Pulse Survey). Most consumers appear to already understand the simple math and the benefits of homeownership. So don’t overthink the matter of whether now is a good time to buy, or whether stock market returns will be better. The exact timing of a home purchase will have little financial impact in the big scheme of things. Just know that homeowners generally do come out ahead of renters in the long run.

This article was written by Lawrence Yun and originally appeared on the Forbes Website on October 14, 2015. The article can be viewed in its entirety here.

Home Buyer Seminars are in full swing! Conducted one for Thomson Reuters yesterday! St. Kates and Hamline in March! Now is the time to buy while interest rates are low and housing prices are reasonable (they are on the rise)!

NEXT SCHEDULED HOME BUYERS SEMINAR:

When:

Saturday March 7th, 2015  10:00-11:30am

Where:

St. Catherine’s University

Mendel Hall, Room 101

2004 Randalph Avenue

Saint Paul, MN 55105

CLICK HERE TO REGISTER FOR CLASS

A reverse mortgage is a loan available to people over 62 years of age that enables a borrower to convert part of the equity in their home into cash.

Reverse mortgages were conceived to help people in or near retirement and with limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care. There is no restriction on how a borrower may use their reverse mortgage proceeds.

The loan is called a reverse mortgage because the traditional mortgage payback is reversed. Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower.

The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the owner lives in the home, they are not required to make any monthly payments towards the loan balance, but must remain current on tax and insurance payments.

With a reverse mortgage, the homeowner always retain title to or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.

The homeowner is responsible for paying their property taxes, homeowners insurance, condo fees and other financial charges. Any lapse in these policies can trigger a default on the loan. To help reduce future defaults, HUD requires lenders to conduct a financial assessment of all prospective borrowers as of January 13, 2014.

Loan fees can be paid out of the loan proceeds. This means a borrower incurs very little out-of-pocket expense to get a reverse mortgage. The only out-of-pocket expense is the appraisal fee, usually a few hundred dollars.

The loan balance is composed of the amount borrowed plus fees and closing costs plus interest. The loan balance grows as the borrower continues to live in the home. In other words, when the borrower sells or leaves the house, he or she will owe more than originally borrowed. If the owner dies, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.

Still confused? Think of it this way: a traditional mortgage is a balloon full of air that loses some air and gets smaller each time a payment is made… A reverse mortgage is an empty balloon that grows larger as time passes.

Mortgage rates have been at historical lows since 2008 following the financial crisis, but the consensus is that they will rise; it’s just a matter of how much and when.

The average rate for a 30-year fixed-rate mortgage has fluctuated between just above 4% and 4.5% for most of 2014. The Federal Home Loan Mortgage Corp., (Freddie Mac), is predicting rates will rise to 5% in 2015.  Factors contributing to an anticipated rate increase include a strengthening economy and the unemployment rate is falling and is expected to continue to do so.  This fall is a great time to buy or sell as the mortgage rates are still low.