The National Association of Realtors is at it again, trying to convince everyone that buying a home is the key to riches. Their economist, Lawrence Yun, wrote an article that appeared in the October 14 issue of Forbes Magazine in which he makes the case that homeownership allows homeowners to accumulate an additional $190,000 in wealth relative to renters: How Do Homeowners Accumulate Wealth? The argument centers around Federal Reserve data that shows that homeowners have a net worth of $195,400 while renters have a net worth of only $5,400.
They call Lawrence Yun an economist but in reality he is a marketing shill for the real estate industry. Much of what he produces basically makes the case for buying homes and he seems perpetually optimistic on the housing market. This Forbes article is a great example because its conclusions are tremendously favorable for the real estate industry but nevertheless deeply flawed. Sadly, Lawrence Yun, as an economist, should really know better because they cover this in statistics 101: correlation does not imply causation.
I’ve actually written about this before but in light of the Forbes article it bears repeating. Not only can you not prove that homeownership causes that wealth difference but there is a simple alternate explanation for the wealth difference: wealthier people tend to buy homes. In fact, you have to have a down payment to buy a home and poor people tend to not have down payments. Renters also tend to be younger and more transitory and younger = less wealth. In other words, rather than homeownership creating wealth, wealth creates homeownership. Of course I can’t prove this alternate theory any more than Lawrence Yun can prove his theory. (A rigorous analysis would control for variables like income and age at a minimum and Lawrence Yun has to know this.)
Mr. Yun goes on to explain the “simplest math” of homeownership which drives wealth accumulation: eventually the mortgage is paid off and the homeowner has equity in the house. This is another deeply flawed conclusion since it totally ignores at least half a dozen costs of homeownership that need to be considered in comparison to renting. For instance, by his logic I will become a millionaire if I simply get a mortgage on a $1 MM house and pay it off over 30 years vs. renting a studio apartment. Yep, what a great idea.
Unfortunately, the shenanigans demonstrated in this Forbes promotional piece undermines the credibility of the NAR and realtors everywhere.
If you want to see the real wealth impact of owning a home vs. renting ignore all this NAR propaganda and just go to the New York Times rent vs. buy calculator and do the math for your own personal situation. Half of the value of using this tool is that it helps you understand all the considerations in the decision on an apples to apples basis with none of this economic sleight of hand.
#Realtors #HomeOwnership #Renting
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email. Please be sure to verify your email address when you receive the verification notice.