The conventional wisdom says that homeownership, rather than renting, is the smart path toward wealth creation. But this has been upended by a new study released Thursday that suggests renters who invest wisely in stocks and bonds may be poised for more lucrative profits down the road.
The study, “A Revision of the American Dream of Home Ownership,” published in the Journal of Housing Research, doesn’t totally undermine the idea that buying property is good for longterm wealth generation.
However, it found that property appreciation on its own is not the wealth boon many of us are conditioned to believe. Instead, the paper discovered that a homeowner’s commitment to put away savings for the inevitable downpayment on property—rather than future equity appreciation of said property—is the stronger factor in why homeowners tend to accumulate wealth faster than renters.
“Society appears to have been telling people the right thing to do (own a home) but for the wrong reason,” write the study’s authors. “More specifically, it appears that homeownership forces saving and when combined with the tendency of households to remain homeowners once they initially switch to ownership explains why owners have more wealth.”
Individuals have more control over their overall wealth through the wise investment of stocks and bonds than they do uncontrollable housing market variables—thus any gains from property appreciation tend to be offset by the stock and bond markets, the study found. The authors surmise that a renter who invests in the market could out perform a homeowner who doesn’t.
“When you assume that those monies are reinvested at a rate of return, renting, on average, wins in terms of wealth creation,” write the study’s authors, Eli Beracha, Alexandre Skiba, and Ken Johnson, faculty members of Florida International University, the University of Wyoming and Florida Atlantic University, respectively.
“The American Dream is alive and well but in need of revision,” Johnson added. “To that end, we suggest not all but most should own rather than rent due to ownership’s embedded commitment to save. Owning real estate should be sold as a strategy to create better set of risk-adjusted returns rather than create wealth alone.”
Email Jotham Sederstrom