Whether you are a first-time home buyer or a move-up buyer planning on putting your equity into your next home, home ownership is a great way to build you overall wealth. Recently, a study was published by First American Mortgage that states home ownership is one of the biggest factors to building wealth. For the last 7 years, homeownership has been ranked as the best investment you can make. A major reason for this is because of the net worth a household gains through home ownership.
Most large purchases depreciate as they age. If you purchase a car, it is worth less than you paid the moment you drove it off the lot. Homes historically appreciate significantly over time. Compare the investment of putting $20,000 cash into some type financial account or stock vs. home ownership. Historically, homes have increased between 3 and 5% per year. If both, of these options increased by 5% yearly that $20,000 invested into a home is SO much more lucrative. First, let’s look at investing $20,000 into a savings account or stock at 5% per year:
Now, let’s look at using $20,000 to purchase a $300,000 home:
The unique power of home ownership is that it appreciates the entire value of the home. You build equity as if you had invested all the money of the entire investment yourself.
Where else can you obtain appreciation on 100% of an investment when you only put down 3%, 10% or 20% of it? In the first scenario that $20,000 is now worth $25,525 or a gain of $5,525 over 5 years. But investing $20,000 in a home where the initial home value was $300,000, it is now worth $382,884, an increase, or gain, of $82,884.
This graph shows only the appreciated value of the home. But housing wealth is a combination of paying off the debt AND price appreciation. Housing wealth takes time. Even when there is a recession home values have always rebounded with time. In 2006, home prices were high and then during The Great Recession of 2007-2009 home prices plummeted. But in the 14 years since 2006 (a time frame that would include the housing recession), the average home price increased from $230,000 in 2006 to a median sales price of $311,800 as of September 2020. That is just over a 35% gain!
The 2019 survey of Consumer Finance data from the Federal Reserve stated “… a primary home accounts for 90% of the total wealth of an average family in U.S.”
The First American study also included a comparison of the net worth of homeowners vs renters. Generally, a homeowners net worth was 40% more than a renters net worth. Owning a home is truly an investment in your financial future!
Is this a step you’d like to take this year to grow your wealth? Contact us for any questions on how to get started. We are here to be a resource for you!