Don’t buy the hype: Homeownership is usually not such a great deal

The American dream of buying your own home is a lie. You aren’t throwing your money away on rent — you’re throwing it away on your mortgage.

Every year, millions of Americans make one of the largest financial decisions of their lives based on financial folklore so deeply embedded into our culture that it is no longer questioned: “Renting is throwing your money away.”

Your friends say it. Your parents say it. The National Association of Realtors has spent billions in lobbying dollars drilling it into your head and into the tax code.

But here is the problem: The data simply do not support it.

Okay, but what about the fact that homeowners have roughly 40 times the net worth of renters? That statistic is plastered over every financial planning pamphlet out there. It is true but misleading, because the wealth has nothing to do with the homeownership.

This is what we call in statistics a “selection effect.” It is a a confusion of correlation with causation — possibly even a confusion of cause with effect. And it could be one of the most expensive statistical mistakes you ever make in your personal financial life.

Before we dive into the actual numbers, just consider the question from a common-sense perspective: Who can afford to buy a home? That would be people who have stable incomes and the personal discipline to save up for a down payment. It would be the kind of people who pay their bills on time and build up good credit histories.

In other words, the fact that homeowners are 40 times wealthier than renters can be partly or entirely chalked up to the kind of people who become homeowners. If you control for income and savings discipline, the wealth gap between owners and renters collapses. So when you say that homeowners are 40 times wealthier, you are describing a........

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