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Archive | January 17, 2012

Creating Wealth Through Homeownership – The Proof




Today, we are honored to have Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research as our guest blogger. To view other research from FIU, visit http://realestate.fiu.edu/. - The KCM Crew

Several real estate economists have shown that the average homeowner accumulates more overall wealth than the average renter.[i]  However, it is not clear how this is done.  Is it that owned property usually appreciates at such a rate that, after considering leverage, returns to ownership are extraordinarily high?  Said another way, might homeowners accumulate more overall wealth because ownership is a great levered equity creator through property appreciation?  Or, is it that owners acquire greater wealth, on average, because they are systematically paying down a mortgage thereby creating equity thanks to loan amortization?  In other words, paying off property creates wealth.

In ongoing research being conducted by Beracha and Johnson,[ii] these and other questions concerning homeownership and the accumulation of wealth are being investigated.  In earlier research, Beracha and Johnson show that renting is the superior investment strategy; however, in this earlier strict horserace between buying and renting, a very bold assumption is made.  Specifically, it is assumed that any rent savings (from lower rent versus mortgage payments) are reinvested without fail. Thereby, after balancing all of the costs and benefits from ownership and comparing them to renters’ portfolios from reinvesting rent savings, renting wins.

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