Homeownership has long been considered a cornerstone of wealth-building in America. It offers financial stability, tax benefits, and long-term wealth creation that renting simply cannot match. While market conditions may feel daunting, the true risk lies in delaying this critical decision. By understanding the financial and psychological benefits of homeownership and the opportunity costs of renting, you can take the first steps toward securing your financial future.
Real Estate and the Investment Barbell Strategy
Personal Finance Reimagined recommends that most individuals allocate 35% to 55% of their wealth to real estate as part of Quadrant 3 of the Investment Barbell Strategy. This can include a primary residence, investment properties, or other real estate investments. Real estate provides stability, tax advantages, and long-term appreciation, balancing the higher volatility in other investment quadrants. By incorporating real estate into your portfolio, you secure a foundation for wealth-building while diversifying your overall investment strategy. Start with a home purchase to lock in housing costs and build equity over time. |
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
The Cost of Renting: A Wealth Drain
Renting a home may seem like the more affordable option in the short term, but it carries hidden costs that erode wealth over time. Rental payments benefit landlords and corporate investors but provide no return on investment for tenants. Rising rents—averaging 7% annual increases nationally since 2020—compound financial strain. In hot markets, rent hikes have been even steeper, intensifying the wealth gap between renters and homeowners.
A lifecycle analysis - which simulates the lifetime homeownership potential - shows the staggering $9 million homeownership big picture impact. About two-thirds of this impact—approximately $6 million—stems from fixing housing costs via a mortgage. Renting subjects individuals to perpetually rising rents, draining wealth-building potential. The remaining one-third of the homeownership opportunity, or roughly $3 million, arises from opportunities to build equity in a home.
Homeowners benefit from fixed mortgage payments, with about 50% of the payment returning to them as equity and tax advantages. This dual benefit makes owning far superior to renting, where every rental payment represents money spent with no return.
Why Buying a Home is a Better Option
Homeownership is not just about having a roof over your head; it is a proven pathway to financial stability. By locking in your housing costs through a fixed-rate mortgage, you protect yourself from rising rents and inflation. This predictability creates a foundation for wealth accumulation, as your income grows while your housing costs remain stable.
A mortgage payment has three key components: principal, interest, and tax advantages. The principal represents the portion of the payment that directly reduces your loan balance, effectively going back into your pocket as equity. Interest is the cost of borrowing, and this is the portion of the payment that goes to the lender. Tax advantages, such as deductions for mortgage interest and property taxes, offer additional financial benefits by lowering your tax liability.
On average, only about 50% of your mortgage payment goes to pay others—the interest on your loan. The remaining 50% comes back to you in the form of equity growth (principal) and tax savings. This structure makes homeownership a highly efficient financial tool, as each payment builds your wealth while providing the stability of fixed housing costs. In contrast, rental payments offer no return on investment, as they solely benefit landlords and provide no opportunity to build equity.
Additionally, homeownership instills a sense of stability and community, offering psychological and social rewards that renting often lacks. These intangible benefits, combined with the financial advantages, make buying a home a cornerstone of long-term wealth-building.
The Serial Collar: Debunking the Market Timing Myth
Since home-owning’s long-term effect is massive, plus, two-thirds of the long-term value comes from fixing the cost of housing, and half the home payment goes to your savings, why would people not get on the homeownership ladder sooner rather than later? Fear is the answer - Fear from the unknown, fear from anticipated effort, and the biggest fear - Fear Of Missing Out. At Personal Finance Reimagined, we help people manage these fears. Next, we discuss the psychology and how our approach overcomes this fear.
One of the psychological barriers to homeownership is the fear of making the “wrong” decision, often driven by FOMO—“fear of missing out.” FOMO is closely tied to the desire to “keep up with the Joneses,” where social comparisons create pressure to match or exceed the lifestyle of peers. This fear stems from a deep-seated human desire to avoid regret and is amplified by the illusion that others are making better financial decisions. In the context of homebuying, FOMO manifests as hesitation to act, fueled by worries about market timing, rising interest rates, or fears of overpaying. Notably, this fear transcends education levels; in fact, I’ve observed it impacts highly educated individuals, sometimes even more than those with less formal education.
The serial collar approach addresses these fears by reframing homeownership as a lifetime series of transactions rather than a single isolated decision. Here is how it works: most people buy and sell homes multiple times in their lives—often starting with a smaller starter home, moving up to a larger home during peak earning years and/or as family demands require, and eventually downsizing in retirement. Over these transactions, the ups and downs of the housing market naturally balance out.
For instance, if you buy a home during a market peak, the next home you purchase is likely to reflect the same market dynamics, meaning you sell at a high price and buy at a proportionally high price. Conversely, if you buy during a market downturn, you may sell at a lower price, but the home you purchase next will also be priced lower. In either case, the net effect over time is neutral, ensuring that no single transaction defines your financial outcome. By the way, your first home includes a sale, the "sale" out of renting - that first sale is assured to be the BEST decision.
The point is, the condition of the market is typically the same because people sell and buy at about the same time. Any short-term benefit or detriment received on the sell side is offset by the opposite effect on the buy side. A benefit becomes a detriment, or a detriment becomes a benefit—in either case, these short-term impacts cancel out. The long-term benefit arises from the upward appreciation trend of real estate over time, which builds wealth steadily regardless of the short-term fluctuations in the market. This reinforces why focusing on long-term value creation, rather than market timing, is critical for homeownership success.
The beauty of the serial collar is that it eliminates the need to time the market perfectly. Housing markets are cyclical and unpredictable, but their long-term trend is upward. Trying to time your purchase perfectly is not only unnecessary but also risky, as delaying homeownership exposes you to rising rents and lost equity-building opportunities.
Over decades, the compounding benefits of fixed housing costs, tax savings, and appreciation outweigh short-term market fluctuations. The next graphic shows a simulated view of a volatile housing market, illustrating the long-term upward trend and potential entrance and exit points when buying or selling a home. The market can remain flat for years before making sharp upward moves, often too fast to act upon given the time required to close on a home. Instead, take the long view and rely on the protection of the serial collar. The key takeaway: it does not matter whether you buy at a peak or a trough, as lifetime housing transactions average out market variations. What matters is starting sooner, locking in costs, and reaping long-term rewards.
Act Now, Build Wealth
Buying a home is one of the most important financial decisions you will ever make. While it may feel intimidating, the long-term rewards far outweigh the risks. Even if you think you have waited too long, remember: it’s never too late to start building wealth through homeownership. The beauty of real estate is its compounding value over time. By buying today, you secure the benefits of fixed housing costs, tax savings, and equity growth starting now.
Delaying further only increases your opportunity cost. Each month of renting represents money spent with no return on investment. Refer back to the lifecycle graph—notice the convex shape of those curves. This means their value increases—or decreases—at an accelerating rate. This mathematical reality highlights why acting now is critical: the value of homeownership accrues significantly to those who get on the housing ladder sooner rather than later. Locking in a mortgage, even in today’s market, protects you from rising rents and sets you on the path to financial security. Whether you’re 25 or 55, taking the first step toward homeownership will have a lasting impact on your financial future. The best time to buy a home was yesterday—the second best time is today.
Take action, start your journey, and watch your investment grow. Remember, the biggest risk is not buying—it’s waiting.
Resources for the Curious
Hulett, J. "Homeownership is an Important Wealth-Building Platform." The Curiosity Vine, 2023.
U.S. Census Bureau. "Historical Census of Housing Tables: Homeownership."
National Association of Realtors. "2023 Homebuyer Trends and Insights Report."
Federal Reserve. "Survey of Consumer Finances, 2022."
Office of the Comptroller of the Currency (OCC). "Mortgage Banking, Comptroller's Handbook."
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica.
Thaler, R., & Sunstein, C. Nudge: The Final Edition. 2021.
Realtor.com. "Rental Market Trends Report."
Knudson, B. "Mortgage Rates Analysis." The Curiosity Vine, 2022.
Taleb, N.N. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. 2001.
I like the serial collar idea - makes sense!