Homeowners should not rely on appreciation in home values to build their wealth according to a new academic study
Homeowners should not rely on appreciation in home values to build their wealth according to a new academic study.
The analysis by Florida Atlantic University, Florida International University, and University of Wyoming, found that households have more control of their overall wealth from their actions, than uncontrollable market forces such as home price appreciation.
"When considering buying and building wealth through equity appreciation versus renting and reinvesting in a portfolio of stocks and bonds, property appreciation does not change the results," said study co-author Ken Johnson, Ph.D., real estate economist at FAU's College of Business.
The study’s findings provide an alternative to the old adage that renting a home is a bad economic policy compared to homeownership. While it may be the case if the money that would have been used for a downpayment is used for consumption, but if it were to be invested the wealth generated could be greater.
"On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds," added Johnson.
That’s not to say that investing in real estate is a bad move. In fact, the study concludes that for most people buying a home is still the best investment because of its embedded commitment to save.
But Johnson says that the way homeownership is talked about as a wealth creator needs revising.
“Owning real estate should be sold as a strategy to create better set of risk-adjusted returns rather than create wealth alone," he said.
The analysis by Florida Atlantic University, Florida International University, and University of Wyoming, found that households have more control of their overall wealth from their actions, than uncontrollable market forces such as home price appreciation.
"When considering buying and building wealth through equity appreciation versus renting and reinvesting in a portfolio of stocks and bonds, property appreciation does not change the results," said study co-author Ken Johnson, Ph.D., real estate economist at FAU's College of Business.
The study’s findings provide an alternative to the old adage that renting a home is a bad economic policy compared to homeownership. While it may be the case if the money that would have been used for a downpayment is used for consumption, but if it were to be invested the wealth generated could be greater.
"On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds," added Johnson.
That’s not to say that investing in real estate is a bad move. In fact, the study concludes that for most people buying a home is still the best investment because of its embedded commitment to save.
But Johnson says that the way homeownership is talked about as a wealth creator needs revising.
“Owning real estate should be sold as a strategy to create better set of risk-adjusted returns rather than create wealth alone," he said.
