The next major mortgage crisis may be caused by renters as they prepare to enter retirement. Liz Davidson of Forbes says
“that today, there’s another mortgage crisis in the works—that is, NOT having one—choosing to rent when you can afford to buy; choosing to forgo building equity in a home as a major source of retirement security…”
Home Ownership as a Source of Retirement Funds
What Davidson is point to is the fact that Americans are choosing to rent, gun shy from the recent housing market implosion and they are doing so at their own long term peril. Homes are assets and as you pay off your mortgage you are essentially creating a savings account that you draw from when you sell your home. Whereas renting does not build any asset that can be liquidated for cash later on in life. Davidson lays out some frightening math:
Two families. A. Rents for $1,500 per month. B. Takes on a $1,500 per month mortgage.
A’s rent goes up 1% per year. Over the course of 30 years A will have paid $900,000 in total rent. (You have to assume rent increases – no one signs a 30 fixed rental agreement!)
B’s mortgage stays constant and B pays out $540,000 over the course of 30 years.
Here is where things get truly scary! A has to continue to pay out rent. B now owns the property out right. A can not sell his rental. B can. And since we assumed that there was 1% inflation we have to appreciate the value of B’s property by 1% per year. If the original home was worth $300,000 at purchase it will be worth approximately $390,000. That is straight cash that they can access when they sell and use to pay for retirement.
At The Alison Moss Group, Cincinnati is more than a city to us–it’s our hometown. Since launching in 2008, our clients have depended upon us to lead them through the home buying and selling journey. We are the go-to resource for all of your needs before, during and after the sale of your home.