The Financial Evidence
Housing finance debates have long raised these questions: What is the ideal US homeownership rate, and what should be the federal government’s role in encouraging homeownership? Offered answers have lacked detailed evidence on the costs of homeownership versus renting. In a recent study we show that homeownership remains highly beneficial for most families, offering both financial gains and a way to build wealth. Home owning is especially beneficial for those who expect to own their home for a long enough period to overcome the sizable transactions costs and the cyclical volatility of home prices.
We begin by determining what a homeowner would have paid to rent a comparable property. From this amount, which the homeowner saves, we subtract all the costs of homeownership, including operating costs, maintenance costs, property taxes, homeowner’s insurance, capital expenditures, and loan payments, to get the property’s cash flow. We then consider the tax deduction value for borrowers who itemize. Finally, to calculate the property’s internal rate of return, we consider the gain or loss from the sale of the home, the property’s cash flow each year, and 7 percent transactions costs from the sale.
For example, a homeowner who kept the home for 14 years, from 2002 to 2016, had an annualized return of 10 percent without the tax benefit and 14.3 percent with the tax benefit. There were individual years within this window in which renting would have been more advantageous, but homeownership was advantageous most of the time, as demonstrated by the high annualized rates of return. The returns varied by the geographic areas examined.
Source: The Urban Institute