Renting vs. Buying a Home

By Michael O'Day

Summary

In the 1980s, the average age of a first-time homebuyer in America was 28 years old. Today, that average age has climbed to 38.

Chapters

  1. In the 1980s, the average age (0s)
  2. Waiting a decade to enter the (8s)
  3. Why? Because according to national historic (13s)
  4. Many renters wait because they think (29s)
  5. Historically, buyers live in their first (38s)
  6. Let's look at the real numbers (54s)
  7. Over the past 10 years, rent (68s)
  8. In total, you will have handed (84s)
  9. Now, what if you bought a (92s)
  10. Let's calculate the wealth you build (114s)
  11. Second, Appreciation: historically, U.S. home values (130s)
  12. Third, Tax Deductions: mortgage interest is (150s)
  13. Add those three pillars together: you (164s)
  14. So what do you think: does (174s)

Transcript

In the 1980s, the average age of a first-time homebuyer in America was 28 years old. Today, that average age has climbed to 38. Waiting a decade to enter the housing market is one of the costliest financial delays you can make. Why? Because according to national historic data, the average net worth of a renter in the U.S. sits at around $10,000, while the average net worth of a homeowner is over $400,000. That is a 40-to-1 wealth gap! Many renters wait because they think they need to save up until they can buy their 'forever dream home.' But your first home is almost never your forever home. Historically, buyers live in their first home for 5 to 7 years. Your first home is a financial stepping stone—a wealth builder designed to capture market appreciation and principal paydown so you can harvest that equity to purchase your ideal home in your ideal neighborhood later on. Let's look at the real numbers comparing renting a 3-bedroom apartment versus buying a median-priced 3-bedroom home in America today. Right now, the average rent for a 3-bedroom apartment across the country is $2,000 per month. Over the past 10 years, rent prices in the U.S. have increased by an average of 5.4% every single year. If you stay renting that same apartment for the next 10 years, your $2,000 payment will grow to over $3,200 per month. In total, you will have handed over $293,000 to a landlord with zero dollars returned to your wealth. Now, what if you bought a median-priced home for $410,000 today with 3.5% down, $14,350, at a 6.5% interest rate? Your fixed principal and interest payment is $2,500. While that payment starts higher than rent, your principal and interest are locked in for 30 years, protecting you from runaway rent inflation. Let's calculate the wealth you build over those same 10 years as a homeowner. First, Debt Paydown: every monthly mortgage payment acts like a forced savings account. Over your first 10 years, you will pay down approximately $60,000 of your loan principal. Second, Appreciation: historically, U.S. home values have appreciated an average of 4.5% per year. At that rate your $410,000 home will be worth roughly $637,000 in 10 years, creating $227,000 in additional equity! Third, Tax Deductions: mortgage interest is tax-deductible; rent is not. If your household is in a modest 10% effective federal tax bracket, tax deductions save you roughly $24,000 over that decade. Add those three pillars together: you build $325,000 in wealth by owning, compared to throwing away $293,000 in rent. So what do you think: does it make more sense to rent, or to buy?