A new study, published by the company HelloWallet, shows that the investment value of home ownership for most median income families is less than the investment value of renting and contributing to tax-favored retirement funds such as 401ks. While most research about homeownership that shows it is financially preferable to renting is based on survey research, Aron Szapiro, the author of “House of Cards: The Misunderstand Consumer Finance of Homeownership,” creates simulations of the two hypothetical median income families in 20 American cities. A median income family is defined as a family of three with $50,000 of annual income. In the simulation, one family bought a house and the other rented a similar house.
The model includes the following cost and benefits of homeownership: home value, unamortized debt, maintenance, property taxes, tax savings from deducting property taxes, the greater of state and local income or sales taxes, mortgage interest above the standard deduction, and the standard deduction itself. For renters, the model includes the value of investing savings from renting into a tax-deferred account, investing the down payment in a taxable brokerage account, and increases in rent.
The author concludes that half of current homeowners would be wealthier today had they rented instead of buying their homes and invested in retirement accounts instead of real estate. Moreover, median income homebuyers get no federal tax benefit in 15 of the 20 cities studied and their benefits were marginal in the other five cities
Recommendations include better financial counseling for median income families so that the full range of asset building options are understood, and reform of the mortgage interest deduction to better serve median income families. Further, tax benefits should be of equal value for homeownership and retirement savings.
To read the full study, go to http://www.hellowallet.com/wp-content/uploads/2014/11/HelloWallet-House-of-Cards.pdf