Homeowner’s Net Worth vs. Renter’s Net Worth: Why the Difference Is So Significant

The decision between buying a home and renting is about much more than just monthly costs and having a place to live. It’s also about long-term financial stability and wealth building.

Studies and reports from various housing market analyses, such as those by First American Data & Analytics and the Federal Reserve, reveal that owning a home can be one of the most powerful financial decisions a person can make.

Key Takeaways:

• Homeowners build wealth primarily through equity accumulation, which results from both paying down their mortgage and home appreciation.
• Despite fluctuating housing markets, even buyers who purchased at market peaks, such as in 2006, have seen significant equity gains, while renters have lost wealth cumulatively over the same periods.
• Renting can sometimes be more affordable in the short term, but it doesn’t contribute to building net worth.
• As affordability remains a concern, the equity gains from homeownership should be considered a crucial factor in the rent-versus-buy decision.

The wealth-building power of homeownership

Owning a home does more than provide a place to live. It contributes to financial stability and increased net worth through home equity accumulation.

Home equity is the portion of the property that the homeowner truly owns, and it increases as the home appreciates in value or as the mortgage is paid down. Homeowners build equity over time, also building wealth over this time. This is an opportunity that renters miss out on.

And while homeownership comes with responsibilities like maintenance and property taxes, it also offers the promise of equity and financial growth. Renting, while simpler in the short term, doesn’t build wealth.

Mark Fleming, Chief Economist at First American, emphasizes this wealth-building power: “Even homeowners who bought at the height of the housing boom in 2006 have gained $169,000 in equity, while renters over that same time period cumulatively lost $229,000 in wealth.”

This difference highlights how homeownership acts as a wealth generator over the long term, even in scenarios where housing markets experience downturns.

Why renting doesn’t build wealth

While renting may seem more affordable upfront, it does not contribute to a person’s net worth. Renting involves paying for a service, in this case, housing, without any long-term return.

Over the years, rent payments add up, and that money is essentially gone forever, with no equity gained in exchange.

Homeownership, on the other hand, acts as a forced savings mechanism. Each mortgage payment contributes to building equity, and rising home values further amplify this wealth.

As Fleming points out, “If the annual equity gained exceeds the other annual costs of owning, then the house ‘paid you’ to live there.” This illustrates how, over time, a home can become a financial asset rather than just a cost.

How net worth grows for homeowners vs. renters

The average net worth of homeowners compared to renters is vastly different. In fact, according to a Fed survey, a homeowner’s net worth is almost 40 times greater than that of a renter.

Here’s a look at the cumulative wealth gained from homeownership compared to the cumulative wealth lost from renting across three different time periods.

Homeowners who bought at the height of the housing bubble (2006 to today)

If someone bought a home in 2006, right before the housing market crash, they faced years of declining home values. However, since 2012, the housing market has experienced continuous growth. Despite the initial losses, the average homeowner from 2006 has gained approximately $169,000 in equity. On the other hand, a renter who paid rent every year since 2006 has spent around $229,000 on rent without accumulating any wealth.

Homeowners who bought over the last decade (2014 to today)

For those who bought a home in 2014, which marks roughly the average homeownership tenure in the U.S., the wealth-building effect is even more pronounced. Home prices have increased steadily, resulting in a cumulative equity gain of around $225,000. Meanwhile, renters who have been paying rent for the past decade have cumulatively lost about $148,000.

Homeowners who bought prior to the pandemic (2019 to today)

Homebuyers who purchased just before the pandemic in 2019 have benefited from one of the hottest housing markets in recent history. These homeowners have accumulated about $158,000 in equity, thanks to rapid home price appreciation. Conversely, renters over the same period have lost approximately $89,000 by paying rent without any return on that investment.

In each of these cases, homeowners who held onto their properties long enough built more equity than the total cost of ownership. Essentially, their home was “paying them” over time. Meanwhile, renters who continue renting face cumulative costs that only increase over the years.

The role of equity in wealth accumulation

Home equity not only increases homeowners’ net worth but also offers financial flexibility.

Investing money in a home means you have the option to access that equity if needed. Whether it’s through a home equity loan or a cash-out refinance, homeowners can tap into their equity for home improvements, investments, or other expenses unrelated to the property.

Renters, however, do not have this advantage, as all their payments go toward the landlord’s equity rather than their own.

The potential for equity growth is why many financial advisors recommend homeownership as a key part of building long-term wealth. Even in uncertain markets, thanks to home equity gains, the average homeowner still has a significant financial edge over renters.

Market trends and affordability challenges

Despite the long-term benefits of homeownership, affordability remains a significant hurdle.

According to data from First American, housing affordability improved slightly in recent months, driven by a 3.1% increase in nominal household income and a one percentage point decrease in mortgage rates compared to the previous year. However, affordability is still 36% below pre-pandemic levels, making it a challenge for many prospective buyers.

Even with these challenges, homeownership continues to provide more financial stability compared to renting. As housing markets fluctuate, owning a home becomes a hedge against rising rent costs, which tend to increase over time.

Should you buy or continue renting?

The decision to buy or rent should be based on your own financial and lifestyle considerations.

The data is clear, though—homeowners generally see their net worth grow significantly over time, while renters continue to miss out on opportunities for wealth accumulation. And remember, this holds true even during periods of economic uncertainty.

For potential first-time homebuyers, it’s important to weigh the upfront costs and ongoing expenses against the potential for equity accumulation and wealth generation.