In the United States, the typical renter possesses a net wealth of $10,400. Conversely, the typical homeowner boasts a net worth of $400,000.
In the United States, the typical renter possesses a net wealth of $10,400. Conversely, the typical homeowner boasts a net worth of $400,000.
"Annually, our rent and even the parking space fee at our apartment complex were increasing. Eventually, relocation becomes necessary, and the rent escalates then as well. This has been the pattern for most of my adult life," Grantham, who is 31, recently confided in CNN.
The housing market in recent years has shown a clear separation between the 'haves' and the 'have-nots' - the homeowners and the renters. Existing homeowners in the United States have seen a significant increment in their paper wealth as house prices have escalated nationwide. Simultaneously, following a brief decrease in rents due to the onset of the Covid pandemic, rents have also increased significantly, damaging many people's savings.
A recent study by the Aspen Institute reveals the enormous wealth disparity that has developed between homeowners and renters in America. The median homeowner in America has a net worth of $400,000 as of 2022, according to the most recent data, while the median renter's net worth is merely $10,400, according to the report. Consequently, the typical homeowner possesses almost 40 times the wealth of the typical renter.
Next month, Grantham is likely to attain her ambition of homeownership when she and her partner conclude the acquisition of a two-bedroom, one-bathroom starter house in Tacoma, Washington, in January. They selected this location, located about an hour outside of Seattle, due to the relatively affordable housing prices compared to major cities.
Grantham stated her long-term goal is to accumulate home equity.
"Although we will be spending a little more on a mortgage than our rent, we are content with that because, at least, we are paying ourselves in a way," she said.
For others, the dream of homeownership feels out of reach.
"I desperately want to be a homeowner," TikTok creator Jordan Swanson said in a recent video. "In this economy, it is virtually impossible."
Those striving to purchase their first homes have been impacted by a double whammy of escalating home prices and stubbornly high mortgage rates. The median existing-home sales price was $407,200 in October, according to the National Association of Realtors. This marks the 16th consecutive month of year-over-year price increases.
At the same time, the era of sub-4% mortgage rates appears to be coming to an end after the Federal Reserve initiated interest rate hikes to combat inflation in 2022. On Wednesday, the Fed is broadly expected to announce a third rate cut this year. Nevertheless, the average 30-year fixed mortgage rate was 6.6% last week, according to Freddie Mac.
A significant factor in wealth accumulation
Purchasing a home has always been seen as one of the most effective methods of building wealth in the United States. As a homeowner pays off their mortgage, their home equity increases, and their property's value may appreciate.
Katherine Lucas McKay, associate director at the Aspen Institute's Financial Security Program, was astonished by the report's findings.
"It really highlights just how much ahead homeowners are in wealth," she said.
The Aspen Institute's report, which primarily relied on data from two surveys, the Federal Reserve's Survey of Consumer Finances and the Survey of Household Economics and Decisionmaking, found that at every income bracket, renters, who make up more than one-third of American households, have less positive cash flow, more burdensome debt, and fewer savings than homeowners. Renters are also more likely to carry student loan debt.
"Homeownership itself is a substantial wealth generator," McKay said. "Simply by not owning a home, your wealth does not grow as much. Instead, you must pay out more money every year on rent, with someone else benefiting from the value increase."
Some individuals may prefer the flexibility provided by renting, though – and the renter-homeowner wealth gap is not solely due to home equity. Nearly 80% of homeowners own additional assets that have the potential to appreciate, such as retirement accounts, stocks, bonds, business equity, other real estate, and other financial assets, including cryptocurrency. This compares to only 48% of renters who own such assets, according to the report.
McKay stated that research indicated renters are less likely to establish investment and retirement accounts.
"That is one of the ways people can grow their wealth beyond purchasing a home," she said.
In many ways, though, the rental market is currently stacked against renters, researcher Shane Phillips of the UCLA Lewis Center for Regional Policy Studies pointed out.
"We offer significant tax breaks on mortgages, home sales, and related expenses," he said of existing government programs. "And the present economic conditions make it more difficult for individuals who do not already own homes or have substantial wealth to join the housing market."
Potentially better days for renters?
However, there are some promising signs for renters as well. There are indications that the rental market may be cooling down, offering much-needed relief to renters with already strained budgets.
Rent prices decreased more than usual in November, according to a report released by Zillow this month – and the percentage of rental listings on Zillow offering concessions also reached a record high last month, at 38.6%.
There has also been a construction boom in the rental market. One million new multifamily units that began construction in recent years are expected to be available in the market this year and the following year, representing a more than 50-year high. This increased inventory could help slow down rent increases in the near future.
Despite the rising possibility that some renters might not initiate a house hunt in the imminent future, there are more hurdles to overcome. Besides soaring property prices, mortgage rates continue to remain elevated. Grantham shared her experience, being approved for a mortgage with a rate of 7.2%, which is quite high for a conventional 30-year fixed-rate mortgage these days.
She added, "Interest rates might not decrease significantly anytime soon, and we were tired of renting. We were ready to accept the compromise of the elevated mortgage rate."
The economic challenges faced by renters are reflected in the business world, as the housing market has seen a stark divide between homeowners and renters. Homeowners have experienced significant increases in their paper wealth due to escalating house prices, while renters have struggled to save money as rents have also risen significantly.
In an effort to improve their financial situation, many individuals, like Grantham, aspire to become homeowners. However, the current economy presents a double challenge with escalating home prices and high mortgage rates, making homeownership feel out of reach for many.