Does homeownership still make sense?

Homeownership has always been at the crux of the American dream. But with housing’s rising unaffordability, that dream is looking more like a moonshot for most everyday Americans — and the juice might not be worth the squeeze. 

For most apartment dwellers, saving for a down payment on a home can take years. For residents of Hawaii, it could take as long as 16 years and seven months. That’s according to a new study, published by Cinch Home Services, which pulled together federal income data, state-by-state apartment rent rates and home sale data to determine how long it would take the average renter to save for a down payment. 

In Hawaii, the median home sale price is $846,000, making a 10% down payment roughly $84,600. An apartment renter earning the state’s average monthly income — roughly $4,800 — would have around $425 to save at the end of the month, after rent and other expenses. Assuming they saved $425 each month, and did so without fail, the renter would spend 199 months saving for a home. 

Hawaii is an outlier, in many ways, partly because the state has both historically high home prices and a lower-than-average earnings among its population. But renters in other U.S. states aren’t faring much better. In California, where monthly median earnings approach $6,000, it would still take the average renter — and a quite diligent saver, I’ll add — more than eight years to save up for a down payment. In Utah, it would take six years. In Florida, five. 

In more than half of U.S. states, an apartment dweller would expect to spend three or more  years saving for a down payment, according to the report. But let’s also acknowledge the unrealistic expectations of a renter spending no money, outside of their basic necessities, for several years — no new clothing, restaurant dinners or trip to the movies, not a single plane ticket or unexpected car repair — in order to save for a down payment. 

Given the gargantuan lift required of today’s renters to become homeowners, it’s worth asking: Does it actually make sense to buy a home? 

That depends on who you ask. Ramit Sethi, a personal finance expert and bestselling author of “I Will Teach You To Be Rich,” told Salon earlier this year that he’s made more money as a renter than a homeowner, in large part by investing in the stock market with the cash he would’ve otherwise spent on home repairs or maintenance in a given year. 

“This is like telling people the sky is green — they simply cannot compute it, and they use the same argument,” Sethi told Salon. “What about equity? Well, I have equity, too. It just happens to be in the top 500 companies in America.”

Homeownership, in its simplest form, is a form of forced savings. Each month, whoever took out the mortgage is forced to set aside many hundreds, if not thousands, of dollars toward acquiring a piece of property that, if all shakes out, will be worth far more than its appraised value at the time the homeowner first bought it. For a handful of generations, that proposition mostly bore out: Over the last 20 years, the average home price in the U.S. has risen from $140,000 to roughly $420,000, according to Zillow — a nearly 200% increase in value. 

But on a year-to-year basis, stock market gains typically exceed home value hikes over a 12-month period. Annual returns from the S&P 500 stock index typically hover between 6.5% and 7%, compared to average home value gains of 4.7% since the year 2000. 

In this way, it’s fairly simple to figure out a savings routine that mimics the housing market — on paper, at least. During a given year, homeowners can expect to spend between 1% and 4% of their home’s value on maintenance and repairs. For a $420,000 home, those costs could range between $4,200 and $16,800 a year, or between $350 and $1,400 per month. 

Saving more than $1,000 a month may not be feasible right now, if ever. But even setting aside $350, $100 or even $50 a month is better than nothing. Investing $50 a month in the S&P 500, and assuming yearly gains of 6.5%, would yield around $23,000 after a 20-year period — not enough for a down payment, but a decent savings cushion. And there are other investment options aside from the S&P 500, of course, like socially responsible index funds and ESG funds, composed of companies that consider environmental, social, and governance issues. These funds tend to generate lower returns than traditional stock market investment, though. 

In the meantime, a Bankrate study published last year found that it’s actually cheaper to rent than buy in all 50 major U.S. metros, with average rents being around 37% less than monthly mortgage payments. The median monthly mortgage payment was $2,703, compared to the average national rent of $1,979.

For once, renters may be finding themselves with more money in their pockets at the end of the month compared to homeowners. But whether everyday costs allow those renters enough wiggle room to build up alternative streams of equity is another question.