If you’re a homeowner in the San Diego area, chances are your house is making you rich. Although there’s no guarantee that homeownership will help you build wealth, the Federal Reserve 2019 Survey of Consumer Finances found that the median homeowner has 40 times the household wealth of a renter. And if you live in the San Diego – Carlsbad area or in several other parts of California, you’ve gained a lot of equity in the last 10 years.
San Diego-Carlsbad Homeownership Equity Gains
Homeowners in the San Diego-Carlsbad metro area have the fifth highest accumulation of equity over the last decade compared to other metro areas in the U.S., and the fourth highest in the last 30 years.
Homeownership Is a Top Contributor to Household Wealth
Homeowners are wealthier than renters at all income levels, but this difference is even greater at lower income levels. And this doesn’t happen overnight. According to Gay Cororation, senior economist for the National Association of REALTORS®, “Wealth accumulation takes time, so the earlier households start owning homes, the greater the wealth accumulation.”
How Does Homeownership Build Wealth?
Appreciation
Your home appreciates. And, yes, sometimes it depreciates, but over the long run, it appreciates. Each market is different, and the San Diego-Carlsbad metro area has done better than most, but over the long-run homes in the U.S.have appreciated at an average annual rate of 3 to 5 percent.
Leverage
Most people don’t have enough cash to buy a home, so they borrow money to purchase it. They are leveraging the home. If the home you buy costs $600,000 and you put 10 percent, or $60,000, down, you will leverage it by borrowing $540,000. If that home appreciates 20 percent during the time you own it, that 20 percent appreciation is based on the $600,000 value of the home. That’s $120,000 in appreciation. But you invested only $60,000. That’s a much higher rate of return on your investment than if you’d paid $600,000 cash for the home.
As with so many good things, there’s a downside too. If homes depreciate, you could lose your investment and owe more against the home than it’s worth. This is why it’s important to buy a home you can live in long-term or rent out if you need to move when markets aren’t appreciating. This allows you to ride out a down market.
Forced Savings
As you make mortgage payments, a portion of that payment in most loans goes toward paying off the principal of the loan. This reduces the amount you owe the bank every month and builds equity in your home. It’s also possible to build equity more quickly or access that equity if needed.
Has Homeownership Built Wealth for You?
If you’d like to find out how much wealth your home has built for you, let me know. I’ll be happy to provide you with a free market evaluation. Or if you’d like more information on how you can take advantage of this wealth-building opportunity, contact me for a complimentary Home Buyer’s Guide.
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.