2 Financial Benefits of Ownership by liuqingyan


									The Benefits of Home Ownership - a Four Part Series

                                   Part 2

    Why are Homeowners So Much Wealthier
               than Renters?

An Examination of the Financial Benefits of Homeownership and Four Main
                Factors Driving this Wealth Phenomenon

Chris Esposito
CM Direct, Inc.
5225-C Hickory Park Drive
Glen Allen, VA 23059
(877) 221-7367

If you have had a chance to read our report about the intangible benefits that
homeownership has on people’s sense of well being, you know that we are very serious
about making sure the conclusions drawn in these reports are based on substantiated facts
from reputable sources.

Fortunately, when it comes to documenting the financial benefits of homeownership as
compared to renting, the task was much easier.

There are countless arguments in reports out there that tout the huge financial benefits of
homeownership. But, as always, we want to go one step further. It is our goal in this
report to not only point out that homeownership does indeed provide an astounding benefit
to your wallet, but we will also list some of the main reasons driving this phenomenon.

But, first, let’s look at the big picture: statistically speaking, homeowners are much
wealthier than renters. Period.

Okay, but you might argue that this statement is flawed, because homeowners must be
wealthier than renters due to a higher income. Nope.

In other words, it is a proven statistical fact that an average homeowner who makes
$25,000 per year is wealthier than an average renter who makes $25,000 per year. In fact,
at this level of income, homeowners are more than 26 times wealthier than renters!

Sounds like a broad blanket statement that can’t possibly be substantiated? Well, if you
don’t want to take my word for it, let’s see what the Federal Reserve Board has to say on
the matter.

Take a look at the chart below. You can clearly see that homeowners, at every income
level, are wealthier than renters at that same level of income.

The financial advantages of homeownership are overwhelming, based on the numbers
provided by the Federal Reserve Board.

But, what if you’re still not convinced?

Let’s take a look at what other economists have to say on the matter.

Eric Belsky, from the Joint Center for Housing Studies of Harvard University, and Joel
Prakken, from Macroeconomic Advisers, LLC, published a joint study titled “Housing’s
Impact on Wealth Accumulation, Wealth Distribution and Consumer Spending.”

They reported that real estate is the prime source of wealth for families in the United
States. Indeed, it is a more important investment than even the stock market. Below is a
quote from their study:

                 Home equity is especially important to lower income households.
                 Among homeowners with under $20,000 in income, three quarters
                 have more home equity than stock equity. Meanwhile, the median
                 wealth of these low income owners is 81 times greater than the
                 median wealth of renters with comparable incomes.

There is no other way to put it. These numbers are staggering, yet factual. In America, if
you want to be wealthy, you almost have to own a home.

Below is a table that has been cut straight from a study by Peter H. Rossi and Eleanor
Weber (from the Social and Demographic Research Institute at the University of

Massachusetts at Amherst). It shows homeowners are more affluent and are more able
attain credit than are renters.

What do all the numbers in this table really mean? It means that the poorer financial
situation of renters is shown clearly by their inability to access credit and their
accumulation of overdue bills.

In plainer English, owning a home creates wealth for you. Renting a home leaves you at a
disadvantage compared to homeowners in your same income bracket.

But, these numbers must make you wonder how could there be such a huge difference?
Why could it work out this way? Why can’t I just invest my money in something other
than real estate to grow just as rich?

Well, I’m glad you asked these questions. Otherwise, the rest of this report would be
worthless to you.

The truth is that there are too many reasons to list in this report. There are volumes of
books dedicated to this very subject. But, fortunately, we can reduce the phenomenon to
four main factors that provide homeowners with wealth that renters will never experience:

1. Real estate is a leveraged investment that enables you to take advantage of 100% of the
appreciation in value.

2. Real estate is much safer (less volatile) than the stock market. Housing appreciation is
basically a steady incline.

3. Homeownership is an amazing tax shelter.

4. Having equity in your home affords you the opportunity to borrow money at a lower
rate than someone who has no home.

                                  Leveraged Investment

Let’s start with the first factor, because it is quick and easy to
explain – real estate is a leveraged investment. What does this
mean, and why is it such a good thing?

When you say something is a leveraged investment, it means that
you were able to purchase it using other people’s money. You were able to purchase it
without paying for it completely with your own money.

In the case of real estate, that simply means that you take out a loan, typically a mortgage,
to purchase your home. If a home costs $200,000, you don’t typically pay $200,000 cash
for it. Instead, you may pay $10,000 as a down payment and have the bank pay the
remaining $190,000 up front. The deed of the home is in your name, though. As the value
of the home increases, you get to keep 100% of that appreciation. So, when the home
increases in value to $250,000, you get to keep 100% of that extra $50,000! You
leveraged your investment by putting only $10,000 down and making monthly mortgage

Even small percentage gains in home values can be large relative to the down payment
invested in a home. In 2003, for instance, roughly one in ten homeowners put less than
10% down on their home. They leveraged the remaining 90%. Yet, they keep 100% of
the appreciation in value.

                    Housing Appreciation is Steady and Constant

Now that we understand the concept of a leveraged investment and see why it is so
beneficial to creating wealth for you, let’s take a look at the concept of housing

Right now, in 2007, the news is filled with reports about the “collapse” of the real estate

market and the “bubble bursting” and all sorts of other story-selling phrases that keep their
programs on the air.

But, how bad are things for real estate? Will house prices ever recover, or are homeowners

Well, the truth is that a news agency doesn’t want to take the time to tell the whole story
about the factual trends of the housing market. It’s boring, and it doesn’t sell news stories
to the audience.

Yes, the United States is currently experiencing a very rare dip in the housing market,
meaning that the prices of homes have gone down slightly from the previous year. But,
that simply means that it is the perfect time to buy and take advantage of the temporary
decrease in pricing.

You don’t want to buy a home when the prices are sky high. Instead, we are in what is
known as a buyer’s market, because pricing is temporarily down and there is a great
selection of homes on the market to choose from.

Take a look at the chart below that plots the median housing prices since 1966:

As you can see from the chart, there have been only three other times in our nation’s
history since 1966 that the prices of homes have taken a small, temporary dip like the one
we are experiencing now.

All of the savvy investors who bought homes during those three periods in our history
ended up making a lot of money over the following few years. Indeed, savvy investors in
today’s market are literally salivating over their chance to buy homes at reduced prices
right now.

Interest rates are still near their historic lows from just a couple of years ago. With low
interest rates, a wide selection of homes for sale on the market, and a temporary dip in
prices, it is hard to imagine a better time to purchase a home.

But, once again, I don’t want you to simply take my word for it. And, I don’t want you to
just rely on one source of data. So, in addition to the chart above, let’s see what Belsky
and Prakken, the two economists cited above, have to say about the consistency of housing
appreciation as compared to other investments:

     While housing is clearly a significant sector of the economy, it also is noteworthy that the value
     of residential real estate has grown far more steadily than the aggregate value of corporate
     equities (Chart 3). Although for several decades housing wealth exceeded stock wealth, the
     1990s represented an unusually strong period of stock growth. For the first time in a generation,
     the value of corporate equities surpassed the value of residential real estate in 1997. The gap
     widened dramatically until the second quarter of 2000 when plummeting corporate equity values
     narrowed the gap. By the fourth quarter of 2001, the value of residential real estate once again
     was greater than the value of corporate equities. In 2003, the value of home equity on household
     balance sheets exceeded the value of stocks directly owned by households by $2.6 trillion.

In examining the chart above, you can see how volatile stocks are compared to housing.
Housing assets have steadily increased over the years. It is not just a factor of more houses
being built, but a factor also of the steady increase in housing values over time.

When you consider that housing has and always will steadily increase in value over the
years, it becomes crystal clear why it creates so much wealth. Couple this with the fact

that it can easily be a leveraged investment, and it becomes clear why so many people take
advantage of their opportunity to build their wealth this way.

                             Homeownership is an Amazing Tax Shelter

Our country’s tax rates are set up to favor homeowners. As long as your mortgage balance
is smaller than the price of your home, mortgage interest is fully deductible on your tax
return. And, interest is the largest component of your mortgage payment, meaning you
will get a good size deduction on your taxes.

You can deduct the interest on up to one million dollars of home mortgage debt, whether it
is used to purchase a first or a second home. You can also deduct the interest on up to
$100,000 of home equity debt, even if you don't use the money for home improvements.

And, real estate taxes are deductible as well!

What could this amazing tax shelter mean to you? Let’s look at an example:

George Renter                                                 Joe Homeowner
George is single with no kids. He takes the                   Joe is single with no kids. His adjusted gross
standard deduction on his income taxes. His                   income is $128,000. Over the course of the
adjusted gross income is $128,000. Over the                   year, he has $3,500 withheld from his
course of the year, he has $3,500 withheld from               paychecks.
his paychecks.
                                                              Joe’s mortgage payments are $1,200 per month.
George rents his home for $1,200 per month.                   Over the course of the year, he paid $11,400 in
                                                              mortgage interest and $1,500 in real estate taxes
                                                              on his home.

Let’s look at George’s federal tax liabilities:               Let’s look at Joe’s federal tax liabilities:

Adjusted Gross Income                       $128,000          Adjusted Gross Income                         $128,000
- Standard Deduction                       - $4,400           - State Income Tax Deduction                   - $3,500
- Personal Exemption                       - $2,800           - Real Estate Tax Deduction                    - $1,500
-------------------------------------------------------       - Mortgage Interest Deduction                 - $11,400
Taxable Income                              $120,800          - Personal Exemption                          - $2,800
                                                              Taxable Income                                 $108,800

George’s Federal Income Tax :                $32,129          Joe’s Federal Income Tax                        $28,409

In the above example, the Joe Homeowner is in the same situation as George Renter with
one key exception – he owns his home instead of rents it.

When it comes tax time, what does that mean? It means that over the course of the year,
George Renter will pay $3,270 more than Joe Homeowner in federal taxes.

Furthermore, Joe Homeowner’s monthly housing cost stays the same for the home that he
owns. On the other hand, George will see his rent increase over time (on an average of
about 3% per year).

Joe Homeowner wins this one!

So, overall, this seems to be great news for homeowners when it comes time to pay taxes.
But, what about when you sell your home? Doesn’t the government want a piece of the
pie then?

Not if you’ve owned your home for 2 or more years.

As long as you have lived in your home for two of the past five years, you can exclude up
to $250,000 for an individual or $500,000 for a married couple of profit from capital gains.
You do not have to buy a replacement home or move up. There is no age restriction, and
the "over-55" rule does not apply. You can exclude the above thresholds from taxes every
24 months, which means you could sell every two years and pocket your profit--subject to
limitation--free from taxation.

Everyone always asks how the rich seem to just keep on getting richer. Well, real estate is
a great way for you to be one of the rich people who keep on getting richer. You can buy
your home as a leveraged investment. You can take full advantage of 100% of the steady
appreciation in the value of the home. And, you can enjoy all of the tax shelters that the
wealthy have been exploiting for years.

But, that’s not all. Here’s another way the rich keep getting richer. If you own a home,
you now have the ability to borrow money at a much lower rate than those people who

           Homeowners Borrow Money at a Lower Rate than Renters

When it comes to the rich getting richer, this last factor almost seems unfair to those who

If you own a home, and you have equity in it, you can borrow money at rates that are much
lower than any rates renters will get.

Renters have few options beyond personal loans and credit cards when it comes to
borrowing money.

Credit card rates can be as high as 18% to 22% in many cases.

However, if you own your own home with some equity in it, you
can borrow against that home’s equity at a much lower rate. For
instance, the rates on home equity loans are tied somewhat
closely to the nation’s Prime Rate, which puts rates on home equity loans in the low 8%’s
to high 9%’s for most borrowers in 2007.

And, consumers can borrow against a home’s equity for a variety of reasons, such as home
improvement, college, medical or even starting a new business.

Indeed, housing is a unique investment, because households can borrow against home
equity at favorable rates relative to unsecured debt to finance consumption and other
investments. By tapping home equity, homeowners are able to lower their debt costs.

For all these reasons, housing’s contribution to household finances is unique and of great

Thinking about the four main factors that were discussed in this report, it’s no wonder why
homeowners are significantly wealthier than renters.

If you are currently renting, look at how much you’ll spend in rent over the next fifteen
              If your
             current         1 YR          5 YRS         10 YRS        15 YRS
             rent is:
               $500         $6,000        $30,000        $60,000       $90,000
               $600         $7,200        $36,000        $72,000      $108,000
               $700         $8,400        $42,000        $84,000      $126,000
               $800         $9,600        $48,000        $96,000      $144,000
               $900         $10,800       $54,000       $108,000      $162,000
              $1,000        $12,000       $60,000       $120,000      $180,000
              $1,100        $13,200       $66,000       $132,000      $198,000
              $1,200        $14,400       $72,000       $144,000      $216,000
              $1,300        $15,600       $78,000       $156,000      $234,000
              $1,400        $16,000       $84,000       $168,000      $252,000
              $1,500        $18,000       $90,000       $180,000      $270,000

Instead of renting, the savvy investor would put that money into his or her own home and
build equity in a secure investment!


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