Home ownership is overrated, study contends
WASHINGTON — Home prices crashed 43 percent between 2005 and 2012, yet polls find that the vast majority of Americans still consider home ownership a good idea and the best way for average people to build wealth.
But is it?
For more than 40 million households — or half of the nation’s homeowners — the answer is no, according to a new study by HelloWallet, a firm that works with employers to provide online financial planning services to workers. People in those households would have built more wealth by renting and investing their money in 401(k)s, IRAs or other types of tax-advantaged investments, the report concluded.
“Home ownership is this kind of unquestioned positive aspiration, when it is not necessarily a good investment for people,” said Matt Fellowes, HelloWallet’s chief executive and a former Brookings Institution researcher.
The benefits of home ownership are often overstated, the study found, even by several popular online calculators that purport to offer guidance to prospective home buyers. The calculators do not consider the wide variations in local property and other taxes, which can dramatically affect the cost of owning a home.
But the biggest mistake those calculators make is the same one that many Americans make: They tend to overstate the tax benefits of buying a home. For many families, the tax write-off that they gain by buying a home is little better than the standard federal tax deduction — $6,200 for single people and $12,400 for a couples who file taxes jointly.
The paltry tax benefits are particularly true for lower-income Americans, the study concluded. A family earning $50,000 a year — close to the national median — sees only a negligible tax benefit from buying a home and would generate 50 percent more wealth over the next decade by investing in their retirement accounts rather than their homes, the report found.
Timing is also a big factor in determining whether buying a home is a good financial move, the report found. The higher that rents are relative to price, the more financial sense it makes to buy a home. That ratio varies from city to city and in different time periods but, overall, most Americans would have been better off renting than buying for most of the past 30 years, according to the HelloWallet report.
Higher-income households have fewer worries in deciding whether to rent or buy, mainly because the tax benefits they reap from buying a home are more lucrative than they are for lower-income buyers. For them, that makes owning a better deal than renting in more cases than not.
All of which raises urgent concerns about federal housing policy, according to Fellowes and study author Aron Szapiro of HelloWallet. They believe the mortgage interest deduction, which they said flows disproportionately to higher-income people in expensive regions of the country, sends a misleading signal to many Americans who assume that tax benefits make purchasing a home a no-brainer.
But the reality is that those benefits are either non-existent or small and fleeting — meaning they diminish over time — for many people. Reforming the deduction to, say, a refundable tax credit for home ownership matched by an equal-sized refundable tax credit for retirement savings, would “send a signal that there are tax benefits to either approach to building wealth,” the report said. That would better distribute the revenue the government forfeits with its tax subsidy of home purchases through mortgage interest and property tax deductions. Federal tax law “should serve a broader wealth-building agenda,” the report said.