February 27, 2013
The Post had a useful article on the growing wealth gap between whites and African Americans. It notes various factors such as higher unemployment rates and smaller inheritances that prevent African Americans from accumulating wealth. However the piece concludes by saying:
“Many experts say housing is still the best way for Americans of all races to build wealth. But it is critical for families to have low-cost financing so they can have predictable housing costs going forward and build wealth over time.
‘If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term,’ said Reid Cramer, director of the Asset Building Program at the New America Foundation.”
It would have been worth pointing out that almost all of these experts also pushed homeownership as a wealth building strategy at the peak of the bubble. Those who followed the advice of these experts were virtually certain to see large losses in home values that would wipe out much or all of their wealth.
Even when housing is not in a bubble, for many individuals who are not in a stable job or family situation, homeownership is likely to be a very bad way to build wealth. There are large transactions costs associated with homeownership, typically around 10 percent of the purchase price. (That’s combining buy and sell side costs.)
If a person cannot expect to stay in a home for at least five years, they are unlikely to cover these costs. In such situations they would be better off renting and trying to save the extra money they would have paid on a mortgage and other ownership costs.
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