Since the financial crisis of 2008 and the Great Recession, fewer people have become homeowners. For starters, it has been harder to get a mortgage. Down payment requirements are higher and so are credit standards.
But there has been something else at work. The collapse of the housing market and the resulting wave of foreclosures prompted millions of people who, before 2007, might have been homeowners, to remain renters.
For some people this may have been the right move. It is obvious that many people in the past jumped into home ownership before they were adequately prepared. But a recent study suggests those who have embraced home ownership have fared better financially than those who have remained renters.
The study by the FINRA Investor Education Foundation concludes that renters are a “financially fragile” population compared to homeowners. They have more debt, less emergency savings and lack the financially literacy of their home-owning peers.
They are also more likely to experience income shocks.
“Given their financial fragility and low levels of financial literacy, the findings suggest the renter population could have a difficult time responding to income shocks and the financial consequences associated with them,” the study concludes.
The study looked at data from 2012. It found that during that year 36% of the population lived in a rented home, a 2% increase from 2000. As you might expect, the renter population tended to be young and make less money than homeowners.
But over time, as they increase their earnings, renters tended to become homeowners – at least they did in the past. The FINRA study found that part of the increase in the renter population is made up of young families, who in the past purchased homes.
Some of the data comes from the National Financial Capability Study (NFCS), which shows that renters have significantly lower incomes than homeowners, even though in many markets monthly rents are now higher than monthly mortgage payments would be for the same property.
For example, 74% of renters have household incomes below $50,000 a year while only 41% of homeowner households do. And even though homeowners are more likely to be married, renters are more likely to be supporting dependents in their households.
Maybe it should come as no surprise then that renters have a greater problem making ends meet than homeowners. Twenty-four percent of renters indicated that they find it very difficult to cover their bills, and an additional 48% found it somewhat difficult.
For homeowners, on the other hand, only 12% found it very difficult, and 39% found it somewhat difficult.
What it means
This is not to suggest that if you are struggling financially, all you need do is buy a home and your problems will be over. What the study may be exposing is not cause but effect.
If you can qualify for a mortgage, you have manageable debt, a good credit score and stable income. If you purchased in the last few years, when both home prices and interest rates have been low, you're doing even better because your mortgage payment is lower than rent in most cases.
The takeaway from the study, the authors contend, is that renters comprise a consumer group that could benefit from targeted financial literacy education.
While the challenges renters face are steep, the authors contend that increasing the financial literacy and capability of renters “may represent one avenue to improve the overall financial wellbeing of over one-third of households in the United States.”