Senate Democrats unveiled a $3.5 trillion spending plan Tuesday to dramatically shore up the country’s safety net. Among the priorities is hundreds of billions for affordable housing — a welcome development in a nation where an affordability crisis is blooming.
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Details are still scarce, but we know that President Joe Biden has called for addressing the shortage of affordable housing options by building and rehabilitating more homes. Boosting the supply of affordable housing alone, however, won’t be enough to solve the crisis. The key to addressing affordable housing, and closing the racial wealth gap along with it, is homeownership.
Often overlooked in efforts to reduce housing costs are ways to help people own rather than rent — even when homeownership is the more efficient and effective option, and provides the kind of stability families need, all while helping build wealth.
Despite a persistent belief that homeownership is reserved only for people who reach some level of financial security, the opposite is the case for a majority of Americans. In two-thirds of U.S. counties, it’s cheaper to buy a home than it is to rent. Financing the estimated median U.S. home with a standard fixed-rate mortgage, the average monthly mortgage payment is less than average monthly rent.
That’s true regardless of household income levels. Renters who make less than $50,000 spend about a third of their income on housing, while homeowners spend only a quarter. And renters who make less than $20,000 a year spend nearly half of their income on housing, while homeowners spend 38 percent. One reason is that mortgage payments are generally stable, while rents tend to rise.
And even though Black and Hispanic homeowners spend a higher percentage of their income on housing than white homeowners, total housing expenses — which included mortgage payments, insurance costs and taxes — are still lower than that of all renters. Black and Hispanic home-owning households spend nearly one fifth of their income on housing expenses, while the typical white renting household spends nearly a quarter of its income on housing.
Over time, the cost of owning a home as a share of income almost always declines. That makes sense, since our income and expenses generally increase over time in relation to the overall rate of inflation. For homeowners, however, the biggest part of their housing expense — the mortgage payment — is fixed, so homeowners end up being better off than renters.
Homeownership is also a key wealth driver because those mortgage payments are building the homeowner’s equity. While renting is purely an expense, owning a home is a combination of an expense and an investment. After that final mortgage payment is made, housing expenses drop steeply, leaving only taxes, insurance and maintenance costs. That sharp drop often coincides with retirement, when income also usually declines. Renters don’t receive that financial benefit.
In crafting public policy, it’s also crucial to keep in mind that a focus on homeownership is a cheaper solution in the long run than rent vouchers, often our go-to affordable housing policy. While rent vouchers are an important social safety net, paying a portion of someone’s rent for years on end gets expensive while doing nothing to assist a family in building wealth — and eventually reducing their need for assistance.
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In fact, according to my calculations, a one-time investment equal to the amount we currently spend annually on rent vouchers could provide a homeownership voucher to enough new home buyers to increase the Black homeownership rate from 42 percent to 60 percent, substantially narrowing the Black-white homeownership gap.
By helping households raise a down payment sufficient to obtain affordable, safe mortgages and developing new ways to assist them in buying a home that don’t exclude communities of color, such as helping families improve their credit in order to qualify for a good mortgage or finding real estate agents who will aid them in finding a home they can afford, we can both increase access to long-term affordable housing and have a major impact on closing the racial wealth gap.
Mike Loftin
Mike Loftin is the CEO of Homewise, a New Mexico-based nonprofit dedicated to increasing homeownership, and a nonresident fellow at the Urban Institute.
FAQs
No tax deductions. No equity. No rising property value. So even though you're spending your rent money on an important living expense, you might feel like you're not making progress with your money.
What are the benefits of homeownership vs renting? ›
Renting offers flexibility, predictable monthly expenses, and someone to handle repairs. Homeownership brings intangible benefits, such as a sense of stability and pride of ownership, along with the tangible ones of tax deductions and equity.
Why is buying a house a waste of money? ›
There are homeownership costs to factor in as well, such as property taxes, maintenance and insurance, so while your home value may be increasing, you're also spending money to keep that up.
What is the main reason to avoid renting to own? ›
Downsides of Rent-to-Own
Your rent may be higher with a rent-to-own property, especially if part of your payment is going toward the purchase price. There may be fees. Nonrefundable option fees vary, but you could lose money if you decide not to purchase the home.
Is rent really throwing money away? ›
A home takes money out of your pocket every month. Some say, “Paying rent is like throwing money away.” That's not true either. You just spent $500 to “rent” an airplane seat for six hours, but you didn't lament about throwing that money away. You enjoyed the benefit of using each item – a home and an airplane seat.
Is it good or bad to rent? ›
However, for those who want to avoid the hassles associated with homeownership, the costs of upkeep, and property taxes, renting might be a better option. Of course, it depends on an individual's lifestyle, financial situation, what they can afford to pay in monthly rent, and whether they're working or in retirement.
What are the disadvantages of renting? ›
All the fees, none of the equity
- Unable to enjoy tax deductions.
- Your rent will most likely grow from year to year.
- You're not building equity.
- More difficult and expensive to have pets.
What are the perks of homeownership over renting? When it comes to buying a home, there are numerous perks that come along with just the house itself; financial stability, financial strength, tax deductions, a permanent home, and a sense of belonging in your community.
What are the advantages and disadvantages of renting and home ownership? ›
Renting offers more flexibility and less upfront costs, but it does not build equity or offer tax benefits. Owning requires a large financial commitment and more responsibility, but provides stability and potential for building equity.
Is homeownership worth it? ›
Owning a Home Helps You Achieve Financial Success
“. . . homeownership is a catalyst for building wealth for people from all walks of life. A monthly mortgage payment is often considered a forced savings account that helps homeowners build a net worth about 40 times higher than that of a renter.”
The most common regret, the outlet found, has to do with an abode's location, followed by having “bad neighbors,” and in third place having a high interest rate.
Is renting an apartment a waste of money? ›
Renting is not a waste of money. In fact, many people make the mistake of assuming that renting is a waste of money. The truth is that renting is actually an important part of the housing market and allows people to live in areas where they might otherwise be unable to afford to buy a home.
What is a major disadvantage of owning rental property? ›
The drawbacks of having rental properties include a lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood's appeal to decline.
Is renting always better? ›
Owners come out ahead of In at least seven major cities in California, long-term renting is cheaper than owning a home. Renters save $900,540 on average in California over a 30-year period. in at least 51 U.S. cities. On average, owners saved $175,811 over a 30-year period.
What is the downside to lease to own? ›
The Cons of Rent-to-Own
Requires a mortgage once the lease ends: While rent-to-own agreements allow you to prepare your finances to own a home, be aware that if you don't have a mortgage approved by the time the lease ends, then this can void the original agreement and leave you without a home.
Why even the rich prefer renting? ›
In major metropolitan areas like New York City and Los Angeles, renting is often the better financial choice. There's no down payment required to rent an apartment (though you may need to make a security deposit), and you're not responsible for any maintenance or repairs.
Is it smarter to rent than buy? ›
It's Cheaper To Rent If You Prefer Big City Life
Despite rising costs, renting has become relatively more affordable than buying year-over-year. The top five cities where it was cheaper to rent versus buy in 2023 were Austin, TX; San Francisco, CA; Seattle, WA; Boston, MA and Portland, OR.
Do most millionaires rent? ›
Wealthy renters live mainly on the coasts, specifically in California, New York and Washington, D.C. San Francisco, CA held second place in the number of millionaire renter households, but had the biggest spike between 2015 and 2020.
Why is everything so expensive to rent? ›
The fast growth of rent costs since 2020 derives from a variety of factors, including: Inflation. Higher costs across the board mean landlords pass on higher costs (such as rising wages for maintenance workers or repair costs) to renters. Higher rent costs contribute to inflation and the cycle repeats.
