Buy a Home & Get Rich

Does that still work? Can you buy a home and get rich? Historically, a person could buy a home, pay down the mortgage, and let appreciation raise their net worth. It has long been standard financial advice that you can build wealth through homeownership. Is that still good advice considering current market conditions and the barriers to homeownership are now higher than ever? The following may be causes of this shift.

Interest rates have increased drastically over the last couple of years. The cost of borrowing has nearly doubled, pricing out many would-be homebuyers. Jumping from a 3% interest rate to 7% could raise your mortgage payment by around $1,000 a month, making homeownership much more challenging.

About one-third of home purchases in the U.S. are cash transactions. The appeal of a cash offer to a seller creates challenges for would-be buyers who need financing. Buyers compete with cash offers that may have faster closing times, inflated purchase prices, fewer contingencies, and less risk of the deal falling through.
Following the roadmap of buying an entry-level home, building equity, and then selling to trade up is becoming more difficult. Most builders are no longer constructing entry-level homes. The high cost of materials and land makes building smaller homes economically impractical for many builders.

The “locked-in” effect is another factor. Many current homeowners were fortunate to purchase their homes when interest rates were below 4%. Moving would mean buying at a much higher rate, resulting in significantly higher payments. This may allow for only lateral moves instead of “trading up” to a larger or nicer home. As a result, many homeowners choose not to sell, reducing the inventory that would normally be available to buyers.
It is still possible to achieve homeownership and build wealth over time, but it may require more strategy and patience. In some situations, renting may be a better option while your income, credit, and savings improve. It may mean looking in more affordable areas, choosing a smaller home, renting out a room or basement, buying down interest rates, or using mortgage or homebuyer assistance programs. Planning ahead by paying down debt, improving credit, and saving for a larger down payment will help ensure you are ready when the right home comes along.

I still believe owning real estate is one of the strongest builders of long-term wealth.