Two years ago, Elizabeth Grantham realized she did not want to rent anymore, so the young woman left her hometown in the expensive San Francisco Bay Area for Washington state to save for a down payment.
“Every year our rent was being increased.” ‘Even the cost of the parking space at our apartment complex went up,’ Grantham, who is 31, recently told USATodayWorld. “Then eventually you move, and soon that rent starts to rise. That’s how it’s gone for most of my adult life.”
The narrative of the housing market in the last few years has been one of increasing bifurcation, of renters and homeowners, of haves and have-nots. Current homeowners in America have watched their paper wealth skyrocket as home prices have risen across the nation. Similarly, after a small decline in the rents after the beginning of the Covid pandemic, rents have also gone up and have cut into many people’s income.
A recent study by the Aspen Institute shows how the divide between homeowners and renters has widened in the United States. The latest available data from the report shows that the median homeowner in America has a net worth of $400,000 in 2022, while the median renter has a net worth of only $10,400. That means the average homeowner is 39.7 times richer than the average renter.
Next month, Grantham will probably realize her dream of owning a house when she and her partner sign the papers to purchase a two-bedroom, one-bathroom first-time home in Tacoma, Washington in January. They decided to build the homes there because the price of homes was relatively cheaper than in big cities such as Seattle, which is an hour’s drive away.
Grantham said her long term objective is to increase home equity.
“We will be paying slightly more for a mortgage than we are for rent now but we are not complaining because at least we are paying ourselves,” she said.
While some people are already living in their dream homes, others are still struggling to make that dream a reality.
“I want to be a homeowner so bad,” TikTok creator Jordan Swanson said in a recent video. “In this economy it’s literally impossible.”
The first-time homebuyers, who have been eager to own their homes, have been hit by two back-to-back problems; escalating home prices and high interest rates on mortgages. The average existing home price was $407200 in October, as per the National Association of Realtors. This is the sixteenth consecutive month in which prices have risen year on year.
However, it is now clear that the era of sub-4% mortgage rates is behind the market after the Federal Reserve started to raise interest rates to fight inflation in 2022. On Wednesday, expectations are high that the Fed will declare that it will reduce interest rates for the third time this year. Nevertheless, the average 30-year fixed mortgage rate was 6.6 percent last week, as per Freddie Mac.
A Major Driver Of Wealth
Purchasing a home has always been regarded as the most effective strategy of accumulating assets in the United States. The home equity increases as a homeowner clears their mortgage balance, and the property value may increase as well.
“It really makes one appreciate how much ahead homeowners are financially,” she said.
The Aspen Institute’s report — which relied mostly on two surveys, the Federal Reserve’s Survey of Consumer Finances and Survey of Household Economics and Decisionmaking — concluded that across every income group, renters, who constitute over one-third of all US households, experience less positive cash flow, higher debt loads, and lower savings than homeowners.
“In fact, the homeownership itself is one of the largest sources of wealth,” McKay said. “It is clear that there are ways that your wealth simply does not grow, just by not owning a home. You invest more money in housing every year in rent and someone else gets the value increasing.”
Some individuals may like the freedom that comes with renting, for instance — and the disparity in the wealth of renters and homeowners is not only in home equity. About 79% of homeowners have another potentially appreciating asset besides their home, according to the Aspen Institute, which includes retirement accounts, stocks and bonds, business equity, other real estate, and other financial assets, such as cryptocurrencies. That is lower than 48 percent of renters who own such kinds of assets as highlighted in the report.
“That is one of the things people can actually do to grow their wealth apart from investing in a home,” she said.
But in many ways, the odds are rigged against renters, said Shane Phillips, a researcher at the UCLA Lewis Center for Regional Policy Studies.
‘There is a lot done to encourage people to own homes.” We have large tax deductions on your mortgage, the sale of your home and things of that nature he said of current programs. “And today’s circumstances imply that those who do not own homes or do not have large amounts of money can climb up that housing ladder.”
A Break For Renters?
But it is not all doom and gloom for renters. It is possible that the rental market is already beginning to slow down, which will be a relief to those renters who are struggling to afford the high prices.
Zillow reported this month that rent prices fell by more than usual in November and that 38.6% of the rental listings on Zillow offered a concession last month, a record.
There has also been a construction of more houses in the rental business. There are one million new multifamily units that started construction in the last two years and will be delivered this year and next year, a level not seen in more than half a century. That increased inventory could help prevent rent rises in the near future.
However, that may not be sufficient to compel some of the renters to embark on a home search in the next few months. Skyrocketing home prices aren’t the only barrier to entry: Interest rates for mortgages are still high and continue to be so. Grantham said she was approved for a mortgage with a 7.2 percent rate, which is high for a 30-year fixed rate mortgage today.
“Interest rates may not go down that much in the near future and we were just ready to stop renting already. That is why we were ready to make that compromise,” Grantham said.
