#Home-Ownership-Builds-Wealth                             November 23, 2017

Earned Income retention and wise use of resources, leveraged for investment through forced savings, can significantly support individual goals of financial independence.

Every day people invest time in occupations to earn money, which quickly becomes disposable income. Disposable is an attitude incorrectly applied to money, considering something disposable is thrown away after it is used.  Do people really throw away their hard-earned money because of impulse buy temptations they encounter daily? Do some people in debt lack understanding about basic principles of personal financial management?  Does this course of wealth destruction really get anybody where they want to be in life? Most people want to be debt free with more time to enjoy life, and more money to spend! Like “The Richest Man in Babylon” taught his students back in 1926, the path to wealth accumulation is personal investment and debt retirement before recreational spending.

In this refection of “Is Homeownership Still an Effective Means of Wealth Building for Low Income and Minority Households? Was it Ever?” (Herbert, McCue and Moyano; Harvard University Joint Center for Housing Studies, 2013),  I will conclude, after twenty one years as a Licensed REALTOR,  that homeownership has always been an effective tool for wealth building compared to renting, simply because most people can secure a real estate with the same earned income they are already allocating to pay rent.  Alternative investments (stocks and business plans) may provide a greater return on investment only if people consistently invest money saved from their monthly housing cost by renting. Many individuals have not developed traits of self- disciple to consistently invest disposable income, choosing to impulsively spending wealth on momentary conveniences. Any short term financial advantage of renting is lost unless the renter consistently applies the money saved to a structured investment, which rarely happens.

Obvious monetary benefits of home ownership include forced savings, real appreciation over time adjusted for inflation, leveraged control of a secure investment vehicle, Federal tax benefits of home ownership (which benefit those whose itemized deduction exceed the standard deduction), housing cost expense control over time compared to renting, and home equity development. Homeowners with fixed-rate mortgages benefit from market appreciation when they realize increased equity. There are numerous quality of life and relational benefits directly related to home ownership, detailed in my article “The Multiple Values of Home Ownership”.

The success of home ownership as a pathway to financial independence is determined by choices the owners make over their residency regarding spending, accelerated debt repayment, leverage ratios, local market demand, lateral moves, annual maintenance, major maintenance, and the consistency of homeowner earned income. Sure, it would be fun to sign for that home equity debt consolidation loan to pay off those 18% credit cards, go on vacation, and buy a pool, yet the long-term costs of cyclical debt loading are much greater than they appear in the advertisement. Equity cash out re-financing for non-property improvement undermines long term wealth creation, possibly creating negative equity in a challenged market, unless the cash-out invested performs better than the real property.  As long as you choose compulsive acquisition over being debt free, you will pay more and get less in life.

People must define needs, wants, entitlements and goals, since a person can have over $1500 a week take home pay from their job and still have debt due to a mentality of self-destructive indulgence  Personal financial philosophies are hard to evaluate, yet the characteristics a financially successful person displays are consistent.  The rejection of revolving debt to acquire frivolous possessions is a noble personality trait for those who live in a culture that constantly proposes the inferiority of everything that is not new.


Fluctuations in mortgage and financial markets have affected some short-term housing related financial gains. The timing of a housing purchase to match secure market conditions can increase return on investment, especially in times of economic instability. Subprime loans exploited a highly publicized pool of underqualified buyers who were the most affected when the housing bubble burst in 2008.  Some of these underqualified buyers possibly participated in additional high-risk cash out activities that were addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Some people were under the impression they would be able to refinance out of adjustable rate mortgages when they improved their credit in the future.

For some households, ownership had a negative effect on their balance sheets, especially between 2008-2012 after exotic boutique mortgages with higher loan to value and origination costs, or secondary piggyback financing appeared on the market. No income verification cash out refinancing practices also inflated perceived home equity values, which intensified the effects of the 2004-2008 housing bubble. Fully extended borrowers quickly went underwater when Loan to Value Rations began to deteriorate in 2008. Unprepared borrowers failed to maintain monthly payments and soon defaulted when they were more than 30 days late. Mortgages often have acceleration clauses which make the default balance due in full on the 31st day, a financial condition that is hard, but not impossible to cure, if the lender is agreeable.  The majority of homeowners have seen their equity values recover from the 2012 value pit, except in a few states. In my home state of Connecticut, our market remains an generally undervalued, low risk housing environment, as defined by “The Carr Value Shelf”.  In November 2017, CoreLogic, a data and analytics company, stated multiple USA metro markets were overvalued, which demonstrates the resiliency of real property values over the relatively short time since the Great Recession.

People with secure resources (family savings or income) are most likely to endure short term financial challenges and succeed in home ownership. Households that lack secure financial resources, when challenged by broad market effects of recession and job destruction, often find maintaining secured financial obligations impossible.  Homeownership makes positive contributions to wealth building regardless of income, education, marital status, and other individual differences, while renters in these same classes build little to no new wealth over time. Households that suffered foreclosure and bankruptcy, yet maintained a commitment to investment through forced saving by mortgaging another home in more favorable conditions instead of renting, are evidence of this fact of wealth building.


Looking at historical USA house price appreciation since 1948 is interesting and reassuring.  From 1920-1945 prices moved in a 10-point inflation adjusted house price index channel, preceding the 1945-1955 atomic expansion and baby boom of the greatest generation. From 1955-1975 the inflation adjusted house price index dropped 10 points over twenty years as the USA struggled with Vietnam. Values fluctuated up and down twice, about 12 points, between 1975 and 1995 maintaining the 100-point baseline established in 1955, prior to the irrational exuberance that preceded the great recession of 2008-2012.

When we look at the period from 1992-2007 we see the timing of entry into homeownership would have a substantial impact on changes in net wealth, greater when we consider the fluctuations in in 30-year fixed interest rates which were above 10% in the 1980, 7% in 1997, dropping to 5% in 2003, to 3% in 2013. Homeowners can accrue substantial wealth through appreciation, as evidenced by prices from the 1945 through 1989, 1991 through 2008 and 2012 through 2017, even more in favorable lending environment like the 4% fixed 30-year rates of 2017. These two periods (1989-1991) (2008-2012) of aggressive real property price deterioration were both caused by banking and security irregularities which have been addressed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Financial markets are important foundations of consumer confidence that can create or prevent another housing value collapse.  Educated home buyers and industry professionals should be more aware of market manipulations, compared to organic supply and demand, should they be presented again. Organic homeownership is more of a long-term quality of life, asset allocation investment than a short-term cash out, unless one is speculating in distressed property or redevelopment.

Renting for life or investing in your future is a daily choice of income allocation, so why rent?  The freedom to move is usually connected to a perception of better future opportunity in another location. This may be a valid choice for people completing college, graduate school, or establishing a career while living in a questionable economic location. Once a person has established a career track, the cost benefit of moving becomes a financial and social proposition that can be balanced by a tax credits for moving costs, employer relocation assistance and the unique, situational benefits of moving to the new location. One would not move just because it costs $20,000  if they were going to secure a new opportunity that paid $20,000 more the first year with better long-term opportunity and security, especially if that scenario did not exist in the current location. Regardless of money, lifetime friends, family and community connections may be hard to leave behind at any cost.

It’s important to remember the same money used to pay rent can be applied to ownership, resulting in disposable income gain over time, so home ownership rarely costs more, while renting always does. People who fail to apply disposable correctly delay debt freedom.  Forced savings in a structured mortgage is especially effective because it is consistent in all market conditions, comparable to the stock market strategy of dollar cost averaging.  Accelerated debt repayment and aggressive self-investment is the fast road to financial independence, especially when one makes greater than minimum monthly payments.  Another exciting example of forced self-investment is Oregon Save, a state run program that automatically takes 5% of your income and transfers it to an investment program of your choice as a deduction, unless you choose to opt out. Never seeing the money is a key to successful dollar cost averaging, since people don’t spend what they don’t see, and get used to spending what they have. As much as we want the newest shiny thing, delaying gratification in favor of fiscal solvency is the royal road to living better, even if that means brewing your own coffee, learning to make dinner, and bringing a lunch to work for a few years.


When we look at people who lost comparable property value what was their response? Some chose to stop paying for something they did not feel was worth what it was sold for, claiming market conditions were manipulated by perceptions of inflated value caused by exotic, piggybacked loan products and financial markets motivation to originate and distribute mortgage backed securities (MBS). These people realized an immediate benefit of living in a property, sometimes paying nothing but utilities, until they were forcibly removed through foreclosure in a process that took months to years. People in foreclosure have been known to keep or spend their mortgage and tax payments, effectively increasing their income while securing low cost shelter. A wise person would have applied this found money to resolution of existing revolving debt or cash savings, while a poorly advised household would have increased their consumption of preferred goods and services. Others, as previously stated, continued to pay their monthly obligations, maintaining a longer-term view of inflation adjusted appreciation, and the Multiple Values of Home Ownership.  Those who lost their income and were unable to maintain payments or refinance due to unique personal factors caused by the Great Recession relocated into alternative housing solutions. Many USA Metros (population centers greater than 500,000) have 2017 House Price Values that now exceed the 2008 peak according to CoreLogic, a data and analytics company. These developing housing markets create issues affordable housing and extreme commuting, especially in California.

The homeowner who completes the multi-year process of foreclosure or bankruptcy can be wrong when assuming they unable to get a new mortgage for one to three years after foreclosure. This misconception may cause a household to choose renting over buying. If a person or household experienced health or employment related financial difficulties that led to a greater the 20% income loss that directly contributed to pre-foreclosure sale, short sale, deed-in-lieu, strict foreclosure, Chapter 7 or 13 bankruptcy, loan modification or forbearance agreement, they are still likely qualified for a FHA Back To Work – Extenuating Circumstances Mortgage (fha.com/fha_article?id=453 ) since the FHA removed the familiar waiting one to three years periods that typically follow a bad credit event in 2013.

The Home Affordable Mortgage Program (HAMP) allows existing homeowners to include income sources including employer and self-employment income, social security, child support, alimony, pension, disability, survivor benefits, rental income, unemployment, and public assistance when figuring pre-tax annual income to qualify for refinancing when they are not in default as of November 4, 2017 per freddiemac.com/singlefamily/service/mha_modification.html

The Home Affordable Refinance Program (HARP) allows existing homeowners who are current on Freddie Mac or Fannie Mae mortgage payments with no equity in their homes, to refinance their mortgage. No matter how much they owe, as much or more than their homes are currently worth, the homeowners are eligible through Dec. 2018,  per harp.gov/about.


The real costs of renting happen over the longer term of your life. To illustrate this we will compare securing a $250,000 single family property to renting a $1875/ month apartment

Rent, Inflation, Appreciation, Property Tax ($5000/year), Maintenance ($2500/year) and Homeowners Insurance ($1200/year) will increase 2%/year in this example. The Mortgage is a 3.5% 30 Year Fixed with $5000 down and no Private Mortgage Insurance ($135/month).  Utilities are not included. This projection adjusts for appreciation and minimal tax deductions at the 10% marginal tax rate. The following is the average cost based on the length you stay for the next 30 years.

You see the Buying Cost go down the second year because  calculator.net/rent-vs-buy-calculator.html  figures the tax deduction and leveraged appreciation directly into the owners cost.


Staying Length Average Buying Cost Average Renting Cost
Monthly Annual Monthly Annual
1 Year $2,883 $34,596 $1,861 $22,331
2 Years $1,972 $23,659 $1,907 $22,885
3 Years $1,686 $20,231 $1,956 $23,470
4 Years $1,557 $18,686 $2,006 $24,076
5 Years $1,492 $17,900 $2,058 $24,699
6 Years $1,458 $17,499 $2,112 $25,340
7 Years $1,443 $17,321 $2,167 $25,998
8 Years $1,441 $17,286 $2,223 $26,674
9 Years $1,446 $17,351 $2,281 $27,368
10 Years $1,457 $17,488 $2,340 $28,081
11 Years $1,473 $17,681 $2,401 $28,813
12 Years $1,493 $17,919 $2,464 $29,564
13 Years $1,516 $18,194 $2,528 $30,336
14 Years $1,542 $18,500 $2,594 $31,127
15 Years $1,570 $18,835 $2,662 $31,940
16 Years $1,600 $19,196 $2,731 $32,775
17 Years $1,632 $19,579 $2,803 $33,632
18 Years $1,665 $19,984 $2,876 $34,512
19 Years $1,701 $20,410 $2,951 $35,415
20 Years $1,738 $20,856 $3,029 $36,342
21 Years $1,777 $21,321 $3,108 $37,294
22 Years $1,817 $21,804 $3,189 $38,272
23 Years $1,859 $22,307 $3,273 $39,275
24 Years $1,902 $22,828 $3,359 $40,305
25 Years $1,947 $23,367 $3,447 $41,363
26 Years $1,994 $23,925 $3,537 $42,449
27 Years $2,042 $24,501 $3,630 $43,564
28 Years $2,091 $25,097 $3,726 $44,709
29 Years $2,143 $25,711 $3,824 $45,885
30 Years $2,159 $25,906 $3,924 $47,092


This projection shows $10,937  (3%) worth of buyers first year acquisition costs, which could be eliminated with 103% owner occupied financing for approximately $44 additional per month.

In this projection we see after thirty years, the initial monthly home ownership cost of $1972 a month has gone up about $200 due to increased costs of the insurance, tax and maintenance, while the $1800 rent has gone up 2% a year to $3924.  In year 31 the homeowner owns the property equity which is projected to be worth about $452,000 while the renter is signing another lease.

Even if the homeowner moved and paid conveyance and sales costs of $20,000, once or twice, they would still be way ahead of the renter in new wealth creation. While existing home sales costs are usually not deductible unless you sell at a loss, moving costs for full time employees and new mortgage origination fees are probably deductible in your tax bracket. Your selling expenses may be less based on your employer’s relocation policies or other unique circumstances. Your taxes, insurance and unique situation can change these projections. These projections are not guaranteed unless all the variables ae exactly duplicated

When we projected the property value over 40 years at 2% annual appreciation, the real wealth of the original $250,000 estate is over $552,000, The person who made a financial decision at age 30 has an asset to sell, rent or leverage into more investments for their retirement at age 70. The $1875 initial rent, being raised 2% per year could cost over $4700 when the lease is renewed in year 41.

This 2% annual appreciation is a conservative, yet powerful projection which should help anybody strongly consider their commitment to renting, especially if you are living in a historically underappreciated part of the country with good economic prospects. I cannot overemphasize the power of leveraged investing coupled with appreciation, income and tax benefits that exist in the real estate market when person borrows money to owner occupy a single or multifamily dwelling.

Where else can you invest $15,000 (3%) to control a $300,000 asset that can appreciate 2% a year? The $15,000 is returned on equity in less than three years. You may want to see how greater appreciation works based on your chosen market location, yet $65,698 appreciation on a $300,000 property in 10 years at 2% annually is a reasonable return on investment, considering you would have borrowed the $300,000 ($1434/month 4%/30yr + $941/month Tax/Ins/PMI/Maint), and the alternative was paying $2375 rent and walking away with a security deposit. You can realize greater gains and a faster debt payoff by owner occupying a multifamily property. If you sell the property after paying transaction fees of up to $20,000 after ten years you can come out ahead, all the time being in control of your environment. If the $300,000 property annually appreciated very well at 4%, your equity after 10 years could be $440,073.  A person who has saved money in a IRA may also decide real estate is better investment than the stock market depending on the specifics of their individual portfolio and local market.


Finally, lets revisit, reinforce and recommit to who needs to be paid first, since the obvious answer is ourselves, yet some people continue put themselves second or third to their debt. Make the choice today. Invest in yourself and your future wealth, no matter how hard it may seem right now. I can attest to the importance of this decision in my life when comparing myself to certain friends who have lived less resourcefully. Old sayings like a penny saved is a penny earned”,  or “It’s not what you make, it’s what you keep” get old by being true.  This means following the path of “The Richest Man in Babylon”, a wise story first told in 1926 following the Great Depression.

The premise of investing in yourself every month is essential, as is paying off debt if you are to enjoy a better life next year. Debts must be paid down as aggressively as possible, especially when we consider the annual cost of owing money at 15% or more per year. While paying down old debt it is essential that you continually build new credit, presenting the impression of credit responsibility instead of credit fear.

How much does your houseful of stuff really cost when you figure the monthly interest?  What exactly have you spent money on in the past five years?  Many people really cannot say where their take home money goes, a symptom of being lost on the ocean of disposable consumerism. What gives you the most satisfaction? What do you have that you cherish, compared to the clutter we are told we must purge to live a happy, minimalist life?  Knowing your resources is the first step to getting where you want to be, yet some people are happy eating and drinking their way through life in an endless loop of restaurants, convenience foods and bars.

It has been said the average USA citizen holds about $4700 per year of credit card debt.  Using $846/year to pay 18% interest is comparable to one extra principle payment per year on a $200,000 / 4% / 30-year mortgage. Enough to change a 30-year payoff to a 23-years.

Additional money and opportunity can be found by having a good credit score, something that cannot be achieved using a debit card. Even if you have old debt you are paying down, use a credit card to pay for everyday expenses in your life, then pay the balance in full every month by managing your money with a free checking account that you never overdraw. Successful wealth creators go the extra step by having their income directly deposited in a savings account linked to a checking account. This creates the experience of seeing what you have earned and where you have disposed of your income. There are a multitude of ways I could teach you to make wealth sourcing a way of life. 35% of USA citizens carry no revolving debt by choice, and harvest the fruit of lower insurance rates and possibly preference in hiring. Some companies now check your financial history as a prerequisite of hiring, seeking assurance their new hires have mature personal management and decision-making skills.  In 2017 it’s not illegal for an employer to ask questions about an applicant’s work, educational, social media, criminal, financial or medical histories.


In closing opportunity exists for those who seek it, as the only dumb question is the one you did not ask. Financial independence is not in the best interest of the purveyors of debt, which is why you will find less writing like mine, and more ads for new credit cards and debt consolidation loans. Set a goal to save a certain amount of money each month and stick to it. Prioritize your spending needs so that investing in you becomes your first choice and second nature. It is my honor and goal to help people improve their lives through wise life style choices that lead to a better outcome. If financial independence was easy, everyone would be doing this, yet we are consistently distracted by advertisements which promise to cure media fabricated inadequacies with shiny objects that will somehow to make our lives better now. The way of the wise is attainable when we keep our eye on the prize of financial independence, freedom, and meaningful moments of life.

In closing, I am David Carr, M.A., PSCS, is a Licensed Connecticut REATOR since 1996, consistently delivering quality and value found in  market analysis, seamless transaction management and fiduciary representation  for his clients who are selling or buying land, residential and investment properties. Find me online, or at my Berkshire Hathaway Home Services New England office, “On The Green” in Milford, CT.  I’m here when the time is right for you, the foundation of your success in real estate.

Copyright 2017 by David Carr. Ct. Licensed REALTOR. All Rights reserved