The Median Homeownership Duration Is Too Short To Build Real Wealth

Old Venetian House On The WaterAccording to the US Census Bureau, only 37 percent of Americans have lived in their homes for more than 10 years, with a median duration of 5.9 years.  If I went ahead and sold my house this year, I’d fit right in between at about 8 years of ownership.

In retrospect, I’m very thankful I didn’t sell the house mainly because I plan to spend more time working from home.   The mortgage was refinanced in the Spring of 2012, making the interest payment 75% cheaper than renting.

It is nuts how low interest rates have gone and I encourage everybody to refinance their mortgage if they haven’t done so in the past six months.  At least check online or call your mortgage broker.

Rental Market Sizzle

The rental market in SF is crazy right now, making it extremely difficult to even get a call back for any desirable property.  Out of curiosity, I submitted an application for one two bedroom, one bathroom condo with no parking for $2,600 a month and didn’t hear a peep back.

With a 798 credit score and income multiple times the monthly rent, I was discouraged when the property manager didn’t even respond to my e-mail!  You begin asking yourself what’s wrong with you, where in reality, there’s just too many qualified candidates looking to rent right now and it’s nothing personal.

I strongly believe the property market will be higher five years from now and I don’t want to kick myself for selling too soon.  Besides the financial reasons of homeownership, the main reason why I didn’t sell is because I enjoy my home.  It’s big enough to grow into, small enough where maintenance is not a bear, and located in a neighbor that I like.  Sure, it would be great if it had an outdoor hot tub and a killer view of the Bay, but that’s another $1.5 million+!

Finally, if I am going to spend 50% more time in my house, the value I get from my mortgage payments goes up by 50%.  One can do an analysis of how much it costs a month for one to live in their homes, much like an hourly wage for salaried employees.  It’s a no-brainer for me to keep on owning.

Future House Selling Plans

My plan is to sell the house in three to five years, invest the proceeds in a yield producing asset and move to Hawaii.  That means I’ll have owned my home for 11-13 years when I do sell.  Now that I think about it more, 11-13 years is not a very long time compared to the duration of homeownership by my grandparents.

They held one of their properties for 40-something years!  In that time period, its value went up by 20X and the mortgage was paid off within the first 20 years.  Lots of bad things happened in the past 40 years and the property still went up by 2000%!  Talk about resiliency and the power of inflation.

The secret to property wealth creation is to just hold on for as long as possible.  A 20+ year holding period smooths out all the volatility.  If I have the energy in three to five years, perhaps I’ll just rent my house out instead.  By then, rents should be up even further while my payments get cheaper and cheaper.

If I don’t have the energy, then I’ll just sell, knowing that in 10 years I’ll be kicking myself!

Recommendations For Homebuyers Or Homeowners:

* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is?

* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Updated 12/1/2014. The bull market is alive and well and rates are still cheap with the 10-year yield at 2.5%.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Buy and hold still works with a house. :) We’ve lived in ours for 8 years now, with no plans to sell.

    Here’s a fact people often overlook: you have to live somewhere. That means if you sell your house, you’re going to have to buy another one, unless you make the strategic move to rent.

    The only time it makes sense to go from owning to renting (from a financial viewpoint only) is when you judge that the housing market (which is cyclical) is nearing a peak. At that point it might pay to sell the house, rent for a year or two until the next recession cuts home prices. Then you buy back your house (or one like it) for less.

    If you want to trade up, the time it makes most sense is in the recession, when the difference between the two houses is at its smallest. If you want to trade down (empty nesters, for example) then the best time to do that is near the top of the market, when the gap is at its greatest.

    Do you plan to rent when you get to Hawaii?

    • says

      Glad you have no plans to sell! My next article will encourage all homeowners to go on strike to lower the ridiculous commission fees charged for selling.

      We are a long way from a cyclical peak. But, as my grandparents have demonstrated, after 40 years wow……. everything goes up.

      I don’t plan to rent in Hawaii.

  2. Mike Hunt says

    Hi Sam,

    I’d wager that people are either needing to move for a new job or need more space as their family grows.

    My wife and I have been in our place for about 6 years and once children come into the picture we will need a larger space… I guess when your grandparents bought they had enough space to handle a growing family…

    -Mike

  3. says

    I think people tend to upgrade a lot but they also move more often now for job opportunities. I think the lesson to be learned is unless you are in a stable part of your life where you won’t be transferring or switching jobs you probably shouldn’t buy a house.

    • says

      I agree 100%. Know where you want to be for 10 years, and have a high conviction level that you plan to stick around at your job for 5 years, and if needed, change jobs in your SAME area for the following 5 years!

  4. says

    One of my siblings just sold her house after living in it for about 4 years. Not only did she not make any money upon selling, she actually had to show up to the closing table with many thousands of dollars. They did this to upgrade to a bigger house and start yet another 30 year mortgage over.

  5. says

    “if it had an outdoor hot tub” Is it too late to fix that? (Although, in that case, your house might host some fratty folks when you go to rent.)

  6. says

    Are you planning on buying a home in Hawaii? (or do you have on already). If you plan on waiting to buy, wouldn’t it kind of be a wash (selling and buying at the higher value or selling and buying at the lower, current market).

    • says

      Indeed that would be a wash if I only had one property to buy or sell, since we all need to live somewhere.

      However, that’s not the case with me. Hawaii is actually around 30% cheaper than San Francisco like for like. Also, I have a house in Hawaii already, just waiting to be occupied!

  7. says

    I’ve owned two homes and never passed 4 years in either (creeping up on 4 in current house with no plans to sell anytime soon). This makes me think my hunch is ok, that if I get wanderlust, I could try to turn my house into a duplex and rent it.

  8. says

    Well, I guess it depends upon a few things.
    1) Did you anticipate a change in family size that may require more living space?
    2) Are you able to keep a steady stream of income that covers the mortgage/rent where you live?
    3) Did you perform some analysis on what the area is like now compared to say 5-10 years ago? Speaking in terms of demographic information like median income in the area, population changes, school systems (if children are in your family), etc.
    4) Will the maintenance be an issue in the coming years? This is both from a physical size of the house and age of the house and the equipment inside it.

    The funny thing is that my wife and I did all those (although we just saw where things appeared to be going for the next 10+ years pretty accurately), which is why we’re still in the house for the past 12 years.
    Did we luck out? Yes, but we did a lot of research into finding exactly what we wanted (and have today).

    • says

      I don’t think you lucked out AT ALL.

      Who doesn’t ask these questions and do such thorough research before taking on the biggest asset and liability of their lives? It would be irrational not to anticipate multi-variable changes and have buffers.

      Of course, some things we cannot predict, such as the financial Armageddon. Life happens always, but I’m surprised the median homeownership is this low with transaction costs so high.

      Perhaps it’s like going out with someone for 1-2 months and breaking up, where 1 month = 3 house years? Just seems strange.

  9. says

    We sold our first home after 3 years. It was a fixer, and we knew we wouldn’t be there long. We did make enough money from the sale to put down a good chunk on our dream house. We have been her 8.5 years, and have no plans to move any time soon. We have enough equity in our house now that we were able to purchase an investment property. It is tempting sometimes to consider selling this house because we could be debt free, but like you said, you gotta live somewhere, and we love it here. Only regret is not keeping that first house as a rental. It would be paid off now and a good cash flow. Just couldn’t get our heads around it at the time. If only there had been PF blogs then!

  10. says

    That statistic is an important and often overlooked one in the discussion of Rent vs Buy. It’s why the recent housing bubble was so bad too… living in a home for less than 7 years became much more prevalent as people began flipping houses and upgrading to larger homes they couldn’t afford… essentially getting caught holding a bigger bag when the music stopped.

    I think it’s a trend likely to continue though as the job market evolves and people relocate to where the jobs are.

    • says

      You can move for a job even with owning a home. You never have to sell..EVER!
      If you don’t believe me, look at Krystal (GMBMFB) who moved to Europe for a year on a whim, and didn’t sell, nor did she rent out her home.

    • says

      This post was not written to convince people to own. This post is written to encourage homeowners to owner their home for longer to build wealth.

      Renting doesn’t build wealth for the renter, so that is a separate issue.

        • says

          Not as much as if the homeowner owns for 40 years. Hence, my point. The homeownership median duration is too short to build real wealth.

          Where did you get 4 years from? It’s really about looking long term. I’m thankful that after 10 years renting out the place, the principal is down about 35% and the cash flow is very positive now. It just takes time.

  11. says

    I’ve lived in my current condo almost 5 years now, and I’m debating to continue living for another 2-3 years. Ideally I wouldn’t want to sell my condo, but flip the remaining mortgage balance into a LOC (more flexibility), rent out the condo (hope for someone to pay it off), and buy a town home with a down-payment of cash/equity from condo.

    What are the housing prices in Hawaii? Renters or buyers market?

  12. says

    We actually bought our house with the plan of living in it for the long haul, at least the next 20 years or so. We are looking at adding an addition but we plan on staying here. We love the area and our house and we don’t want to give that up. Plus we are looking forward to having it paid off and a liquid asset.

  13. says

    Great timing Sam. I am looking to buy a home and one thing I made clear to my wife is that whatever we buy we are living for the rest of our lives. No upgrading so we planned to get something that will fit a growing family but nothing were we “need” to downsize later in life unless we can make that 2000% like your grandparents. Fact is most of the older generation use to live in there homes then pass it down to the children. It wasn’t looked upon as a form of money. Everyone wanted to be able to go back to the home they were raised in.

    What I see happening a lot – people buying just because. Not that they need another home but after 3-5 years they buy another one. Then 5 years later another and then the want to downsize so they get another one. In most cases they are buying at the peak and not even making money off the house they sold. Just doesn’t make much sense if you ask me.

    • says

      Good stuff Thomas. The transaction costs are killer, making it not worth moving imo after just 5 years. Maybe 10 years…. but before then, it just seems unwise to change if you don’t have to.

  14. says

    I have lived in my current home for 15 years. I will probably move one more time to a single level location sometime in the future. I am not sure when, but it will be when my wife and I cannot go up and down the stairs.

    The average stay in a home surprises me because it reminds me when the market was better and people were more mobile. It is harder to sell a home unless it is priced right in most markets.

    • says

      Do you feel your knees giving out a little now Larry? I worry about this since I am a tennis player and tennis is very hard on the knees.

      One story track homes sound good, or just one level higher.

  15. says

    I own my home for 7 years. It’s almost 10,000 sq. ft. including basement. My wife and I are seriously thinking to sell this as it is too big for two of us. So, it makes sense to keep house for a long time, I am not sure it makes sense in our case. I also think that most Americans move where they can find better opportunities. It’s hard to find employee who can work for a company and retire anymore.

  16. says

    I have owned my house for 5 years and exactly 2 months (closed on June 13, 2007 lol). I would love to keep it and rent it out but deed restrictions prevent that so its on the market.

    If San Fran is that hot and the housing market is still struggling by most accounts…imagine what the rest of the country is doing!

  17. says

    Good point, Sam. With the upside down nature of PMI calculations, you really don’t start putting a good dent in your mortgage principal until you are 1/3 to 1/2 of the way through your mortgage term. We recently refinanced down from a 30 to a 20 with a much lower rate, but we had to run the numbers to make sure that we were still coming out ahead, considering the fact that we had already been paying for 8 years..

  18. says

    Second Part:
    Don’t sell your house Evan. You don’t need something bigger. Think about all the starving people in Somalia!

    Guess you can say that about everything…why have a smart phone for example you could donate the dollar difference and just get a prepaid? Why eat at an expensive restaurant? etc.

  19. Ann Rachel says

    Hey Sam, that’s so cool that you are planning on buying and settling in Hawaii, cause that’s my dream too, there’s so many that make “landlording” a part of their retirement plan and we hope to get there sooner rather than later. We lived in Hawaii, and moved because of cost of living to Salt Lake City. We bought our home just this year in January and got a 15 year loan, our mortgage officer said that we were the only young couple she’d taken care of that was doing a 15 year. We are very happy with the rate and hope to pay it off a lot earlier and invest some capital to be used to buy my in-law’s house in Hawaii, since it’s close to the university we would have a steady influx of tenants. With buying and selling real estate I hear that you can shave thousands if not tens of thousands on a more expensive property when doing a private sale or “for sale by owner.”

  20. says

    I’m trying to convince my mother not to sell her house yet. There’s so much work that needs to be done and there are way too many houses on the market in her neighborhood right now. Hopefully she will be patient to wait a few more years.

  21. says

    We have owned for 2.5 years, and really hope to make it to the 10-year mark. the problem is we have a 3-bedroom, and plan on 3+ kids, so we might outgrow it sooner than that. I guess bunk beds it is!

    But really, I want to have some decent equity in 10 years, and either buy and rent our current home, or sell and drop a large down payment to free up more monthly cashflow. But as you stated, holding longer causes more stability and a better chance of coming out ahead, so the buy and rent option seems much better. I need to reverse engineer how much cash I need ot make that happen….

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