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Why, despite the high interest rates, buying a home is still more profitable than renting it out

2023-11-11T17:31:42.633Z

Highlights: Why, despite the high interest rates, buying a home is still more profitable than renting it out. "In an environment of low (economic) growth and high inflation, real estate is a very, very solid investment," says one expert. The median home value — home value minus loans like mortgages — rose 44% between 2019 and 2022. The net worth of U.S. homeowners was $396,000 at the end of 2022, compared to $10,000 for renters, according to the Federal Reserve.


"In an environment of low (economic) growth and high inflation, real estate is a very, very solid investment," says one expert.


By Marley Jay and Jasmine Cui – NBC News

It's getting harder and harder to break into the U.S. real estate market, but for those who have managed to invest, the benefits are often enormous.

Investment experts have long said that one of the best reasons to buy real estate is that, when inflation rises, it holds its value more than other investments like stocks.

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That has been true during the inflationary spike of the past two years. According to the Federal Reserve, the median home value — home value minus loans like mortgages — rose 44% between 2019 and 2022. The Fed only included primary residences in that analysis.

For that reason, the net worth of U.S. homeowners was $396,000 at the end of 2022, compared to $10,000 for renters.

The S&P 500 index rose about 32% from the end of 2019 to the end of 2022, in a sign of strong performance. But stocks have been more volatile, in part because their performance is closely tied to factors such as corporate earnings and investors' views on the future of the economy.

"In an environment of low growth and high inflation, real estate is a very, very solid investment," says Jamie Battmer, chief investment officer at Creative Planning, a wealth management and financial advisory firm that works with clients who own nearly a quarter of a trillion dollars in combined wealth.

Battmer says that even in a context like the current one, where growth is solid and inflation is elevated but not as high as it was a year ago, real estate tends to perform well compared to stocks and bonds.

The sharp rise in home values also means that the housing market is increasingly contributing to wealth inequality.

It's such a powerful tool for building wealth, even in bad times, that financial experts are advising clients to seriously consider buying a home, even with prices at all-time highs and mortgage rates at their highest levels in two decades.

"The perception people have is that it's a bad time to buy, given the level of prices and interest rates," said Jason Obradovich, chief investment officer at New American Funding. But he clarified that that's not necessarily true. One reason is that if mortgage rates go down, prices will likely go up in response.

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"We haven't had a lot of inflation, and yet real estate prices have gone up a lot," Obradovich said.

The annual rate of inflation in 1980 was just over 14 per cent. That same year, mortgage interest rates topped 16%.

"Interest rates have been going down for about 40 years straight, and that has obviously pushed up the value of real estate because people can afford a much larger payment," he said.

Obradovich says the lowering of interest rates is inevitable because the Federal Reserve knows that the U.S. economy needs such a move to achieve any kind of growth.

"When rates go down, you have the ability to refinance at a much lower rate," he says.

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When rates drop, prices are likely to rise again because it will be less expensive to take out a mortgage. That means, for those who can afford it, it might be better to buy now than wait.

"If you rent, the price of your home will probably always continue to go up," he said, referring to the price of rent.

Obradovich and Battmer similarly referred to the role a home can play in individual finances over the long term.

According to both, for many people, a house becomes a kind of retirement savings account. Every time you pay off a mortgage, you gain equity, and the longer you own and the more prices go up, the more value you can get by taking out a home equity loan or home equity credit.

"The great American dream of housing lives on and is a key element of the wealth of an average household," Battmer says.

Source: telemundo

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