• Policy Impact:

  Government policies heavily influence the balance between renting and owning a home, affecting affordability and access for younger generations.

• Wealth Building:

  Tax incentives favor homeowners, enabling wealth accumulation through property equity and deductions not available to renters.

• Housing Shift:

  The pandemic caused a mass exodus from urban areas to suburbs due to safety concerns and a desire for more space and lifestyle changes.

• Market Dynamics:

  Low-interest rates during the pandemic drove up suburban housing prices, creating affordability challenges now with higher rates and stagnant liquidity.

• Challenges for Buyers:

  Prospective homeowners face hurdles in affordability, pushing many towards renting while aiming to save for future down payments.

• Future Uncertainty:

  Speculation lingers regarding a potential housing bubble burst, driven by market pressures and the need for price adjustments to match buying power.

Renting vs. Owning: A Financial Dilemma

When fiscal policies start influencing the balance of supply and demand in the housing market, I can’t help but look ahead. I think about the next 20, 30, or even more years and consider how it’ll impact recent graduates trying to step onto the homeownership ladder and start building their wealth.

On the flip side, when policies make home buying too accessible, I worry about whether people are truly prepared and financially equipped to handle the responsibilities that come with homeownership.

Various studies, drawing from different data sources, consistently highlight that somewhere between 60% to 70% of our nation’s total net worth is either tied up in real estate or stems from property ownership.

Tax Policies and Wealth Building

Tax policies promote homeownership by permitting homeowners to deduct mortgage interest from their taxes, a benefit not available to renters. This places renters at a disadvantage when homes become excessively expensive.
They face two key setbacks:

• Wealth Accumulation: Renters miss out on the opportunity to build wealth through the gradual accumulation of equity in real estate.

• Higher Tax Burden: Assuming no other special circumstances, renters typically face a higher effective income tax rate. Additionally, property tax, which is a deductible line item, further favors homeowners over renters.  

Shift in Housing Trends

As we approached the year before the pandemic, the housing industry focused heavily on millennials and GenXers. They were seen delaying household formation, embracing single life well into their 40s, and favoring urban living.

But when the pandemic struck, city life transformed into something out of a science fiction film. Streets stood empty, and the threat of a virus, capable of surviving on surfaces for days or even weeks, loomed over everyday objects like elevator buttons, door handles, and train seats. For those residing in high rises without a car, avoiding these surfaces became a challenge.

Initially, predictions suggested a 90-day cycle for COVID-19 to fade away. However, that optimistic outlook proved wrong. With time passing from months to years, urban residents began migrating to the suburbs.

These individuals, often in their thirties, were settled in their careers and might have been cohabiting without immediate plans of marriage. However, being confined together in an apartment during lockdowns forced a reevaluation of their living situation.

The Evolving Housing Market

The idea of a family, space for them to play, and perhaps a dog entered these affluent home buyers minds and they soaked up every good suburban house they could find. Prices in undesirable areas soared, sometimes by multiples as they did here in the Phoenix Metro Area.

Interest rates were in the 3%, sometimes 2%, and fixed for 30 years so why not pay a record price, the dollar went further. 

Solutions for Aspiring Homeowners

Now, in 2023 the rates are 7.6%, with little liquidity in the system, but the home prices are still at or near pandemic pricing, making what seemed like a stretch for homebuyers, a full-on impossibility. With no hope of homeownership for the foreseeable future due to affordability, there will no doubt be a pall cast over the for-sale real estate market forcing household creators to rent and, hopefully, save up for that huge downpayment on a house one day.

Or will the housing bubble burst, as people who need to move finally lower prices such that they hit a targeted demographic buying power level?

That remains to be seen.