Despite the worst housing crisis since the Great Depression, homeownership is still central to the hopes and aspirations of many Americans. Recent polls show that the American public places very high importance on owning a home1 and that homeownership is more closely associated with living the American Dream than are graduating from college, becoming wealthy, or securing a comfortable retirement. Four out of five Americans believe that buying a home is a better financial decision than renting one (Allstate/National Journal, 2011). This steadfast belief in the importance of homeownership,
despite the recent collapse of home values, reflects America’s deeply-held conviction that owning a home bestows more financial and non-financial benefits than any other single asset. The Value of Homeownership Financial Benefits. Owning a home has long been the most accessible way to build wealth in the United States. Although not without financial risks, homeownership provides the opportunity to build equity through two separate mechanisms. First, over the long term, housing prices tend to appreciate. Nominal home values have increased, on average, about 5.5% annually between 1977 and 2011.2 Although adjusting for inflation lowers the real price appreciation to 0.5-1.5% per year,3 homeowners realize returns on the entire value of the home, not just their initial down payment. Consequently, their overall rate of return is actually higher than real-price appreciation rates would suggest.4 Second, because traditional mortgage products require borrowers to pay off a portion of the loan’s principal balance each month, over time homeowners gradually reduce their debt and build equity. Therefore, when such traditional mortgages are used, homeownership provides a “forced savings” mechanism for households.
This is particularly important because the actual savings rate in the U.S. has been quite low in recent years.5 In addition, although the relative cost of owning a home compared with renting depend on a host of factors (e.g., rental prices, prevailing interest rates, property taxes, homeowners’ insurance premiums, home maintenance costs, etc.), there are federal tax deductions for mortgage interest, mortgage insurance, and property taxes. These tax deductions, as well as the special treatment of capital gains for primary residences, provide considerable public subsidies for homeownership that enhance its financial benefits (Dietz, 2009).
The wealth acquired through homeownership has been a key source of economic mobility and financial security in this country for decades. Home equity can be tapped to start a new business, pay for higher education, and secure retirement. In addition, home equity provides a financial cushion against unexpected financial hardships, such as job loss, divorce, or medical expenses. Perhaps the high value that Americans place on homeownership may be explained, at least in part, by the country’s relatively low public subsidization for many of these expenses. Nonfinancial Benefits. Homeownership also bestows a host of non-financial benefits on individuals and families. Research suggests that children who grow up in home-owning households perform better academically, are more likely to graduate from high school, and are less likely to become teen parents (Dietz, 2003). In addition, studies have shown homeowners to be happier (Dietz, 2003) and have higher levels of satisfaction than similarly-situated renters (Rohe, Van Zandt, & McCarthy 2001).
It is not known exactly why homeowners are happier or more satisfied, but some potential reasons include greater feelings of control, more desirable locations of owner-occupied properties, and the relatively limited tenants’ rights in the U.S.6 (Immergluck, 2011). External Benefits. The advantages of homeownership extend beyond the direct benefits to homeowners. Neighborhoods with high homeownership rates tend to have higher property values (Rohe & Stewart, 1996) and consequently higher levels of tax revenues. These resources can then be used to support community assets that benefit all residents such as schools, parks and recreational facilities, and public safety programs. The evidence also suggests that homeownership increases civic engagement, since home owners are more likely to vote and volunteer in civic and philanthropic activities (Rohe et al, 2001).
