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Key Takeaways
- Buying a home has become out of reach for most Americans, with prices rising much faster than incomes.
- Renting doesn’t necessarily mean falling behind financially—economist James Choi notes that the costs of owning can often exceed the expense of long-term renting when accounting transaction costs.
- Tax benefits tied to homeownership often result in people being more willing to spend money on buying a home, meaning they may not always translate into better financial outcomes.
With property prices rising and wages not keeping up, the ability to buy a home is out of reach for many Americans, but that doesn’t have mean renting is necessarily a bad option.
A recent study from the National Association of Home Builders found that homeownership was unaffordable for nearly 75% of U.S. households.
In the study, researchers estimate that a household would need to earn least $141,366 to afford a median-priced home ($459,826) with a standard, 30-year fixed mortgage. That would mean only 25% of households could afford a home, assuming that mortgage payments comprise less than 28% of a household’s monthly income.
“I think people should buy a home if the type of home they want to live in is only available to buy,” said James Choi, Professor of Finance at Yale University and an expert on household finance. “But if they find themselves renting and they’re happy with the home they’re renting, there’s no financial urgency to buy.”
Renting vs. Buying, According to An Economist
Since home ownership has traditionally been thought of as a way to build generational wealth, some might worry that renting leaves them financially worse off compared to their homeowner peers.
However, Choi thinks the difference isn’t as stark as it seems.
“In a rational, frictionless market, the cost of buying a house equals the cost of prepaying all of the rent the house would command over its useful life minus the cost of prepaying all of the ownership-specific costs (e.g., property tax) that a renter of the house wouldn’t have to pay,” said Choi. “In other words, it costs as much to buy the house, live in it for x years, and sell it as it does to rent the house for x years.”
He adds that while real markets aren’t perfect, they aren’t hugely different than the frictionless, rational market conceptualized by economists.
“So my perspective is that there is no great financial loss from renting instead of buying. And it can be advantageous to rent instead of buy because the transaction costs of buying and selling a house are so high,” said Choi.
Another common argument in favor of homeownership is tax benefits. For example, homeowners who itemize their deductions can deduct up to $750,00 worth of mortgage interest.
But Choi notes these tax benefits can be misleading, as they may encourage people to actually spend more on a home versus pocket the savings.
“Those tax breaks serve to increase the price people are willing to pay for the house, so the home price will be bid up. It’s not at all obvious that the tax breaks associated with homeownership lead to higher financial returns to owning a home in a competitive bidding environment,” he said.
The Bottom Line
With rising home prices and stagnant wages, owning a home may seem out of reach, especially given that the median home is considered unaffordable for nearly three-quarters of American households.
While it may feel like you’re falling behind financially because you’re still a renter, economist James Choi notes that homeowners don’t necessarily always come out ahead. So if homeownership isn’t in the cards for you right now, there are still other paths to building wealth.
