Cutting Edge Insights
with Dr. Lee

Unpacking the Homeownership Psychobabble

Owning one’s residence has long been viewed as a worthwhile attainment and something to strive for in America – and has been referred to as “The American Dream.”

There is no shortage of data that imply that homeowners are more likely to have a higher income and net worth than non-homeowners.

Recently, I have stumbled across blog posts and articles that seem to insinuate that home ownership somehow has a causal relationship to building wealth:

“Homeownership Remains Strongly Linked to Wealth-Building”

OK, that’s not so bad.  “Linked” seems to be used in the sense of “correlated to”.

“For the majority of households that transition into homeownership, the most recent data reinforces that housing is one of the biggest positive drivers of wealth creation.”

That’s a bit of a stretch.  Home ownership doesn’t drive wealth creation any more than lack of homeownership drives wealth destruction.

“Homeownership is the Top Contributor to Household Wealth”

I suppose this one isn’t terrible because it is breaking down the individual components of household wealth, not defining predictive factors.

Generally, these headlines leave me scratching my head.

I mean, we know that cigarette smoking causes cancer.  Maybe now, maybe later, but if you smoke long enough, you’ll get cancer.

Causal relationships (if x is true, then y absolutely happens) are more difficult to establish (more extensive testing and studying, etc.) than those of correlation (if x is true, then y is more likely to happen).

Rich Dad, Poor Dad author Robert Kiyosaki indicates that your home is not your biggest investment (contrary to mainstream financial advice which says that it is); rather, it is your biggest liability…because it takes money out of your pocket.

I agree with him, but I nonetheless prefer to own my home because of all the benefits I receive:

*I don’t have to answer to a landlord

*My lease never expires

*My rent never goes up

“My income tax bill is always lower”

*A mortgage is a great forced savings account

*I like inflation-powered debt debasement

*I like leveraged appreciation

*it’s MINE…in other words, I enjoy constitutionally-granted private property rights

I’ll take the good and deal with the bad (insurance, maintenance, utilities, etc.).  That’s simply my attitude.  Your mileage may vary.

For the record, there are real estate stalwarts (Kiyosaki may be one of them) who advise that you rent your own home and own homes to rent to others.

The rationale is correct financially, but I still prefer owning my home.  At least for now.  When I tire of doing yard work, I may change my mind.

I actually think it’s sad that such a large proportion of Americans’ net worth exists as home equity – it’s illiquid and according to Keith Weinhold (Forbes writer and host of the Get Rich Education podcast), its rate of return is always zero (more on this in a future article).

To me, this fact is simply a big, bold underscore of the thought process engrained in our minds that we should strive to accumulate a mountain of stagnant wealth rather than vibrant, regular monthly streams of wealth.

After all, financial independence is defined as when one’s passive income is sufficient to meet one’s monthly obligations.  This can be true at any level of net worth.

In summary, I’d like to propose an edit to the “Homeownership predicts wealth” mantra.

But first, if you don’t own your home, relax.  This isn’t a statement of judgment, or of right or wrong.  It simply is a characterization of facts.

My version of it is, “Homeownership is correlated with a higher level of financial education.  Higher levels of financial education are associated with higher levels of net worth.”

Let me know if you agree with my assessment.

As you think about that, resist the temptation to be influenced by the free financial advice that runs rampant in our media.  The only thing good about it is that it actually is worth the price paid.

Until next time,

Dr. Lee Newton

As always, I give ideas, not advice.

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