By Gay Cororaton, Chief Economist
One of the benefits of homeownership is the wealth it brings, mainly through the appreciation of home values. Over a 5-year period (2018 Q1- 2023 Q1), the median single-family home prices increased on average by 64% in the counties of Miami-Dade, Broward, and Palm Beach, resulting in an average home price gain of $220,000. Over a 10-year period (2013 Q1- 2023 Q1), home prices have nearly tripled, resulting in an average home price gain of $340,000 in these counties. The tremendous price gains result in a wealth gain that beats investing in the stock market. The returns to owning are positive even after deducting interest, real estate taxes, insurance, maintenance, and closing costs.
Homeowners Gained $340,000 on Average from Price Appreciation Over Past 10 Years
The home price appreciation gains beat the returns from investing the 20% downpayment, 3% closing cost, and the principal payments in the stock market. Over a 5-year period, the return from investing instead in the stock market is on average $50,400 compared to the average price appreciation gains of $220,000 in the three counties. Over a 10-year period, the average return from investing in the stock market is $162,000 compared to the average home price gain of $340,000 in these counties. (Graph 1)
Even accounting for the costs of purchasing and maintaining the home—closing cost, interest payment, tax, insurance, and maintenance—homeowners are likely to see a net positive financial return because the costs of owning a home are lower than the price appreciation gains (tax, insurance, and home maintenance assumed to be 5% of home value) [1]. Over a 5-year period, a homeowner is likely to have spent $180,000, which exceeds the price appreciation gains of about $220,000. Over a 10-year period, a homeowner is likely to have spent $247,000, which exceeds the home price gains of $340,000. (Graph 2)
Renters have typically not built up any wealth gains once the cost of renting is deducted from the stock market gains. Total rent costs over a 5-year period average about $70,500, which exceed the stock market returns of $50,700, yielding a net loss for someone who instead chooses to invest in the stock market and to rent. Over a 10-year period, the average rent cost in the three counties is $161,600, which is about the same as the total stock market return of $161,200[2].
Top Municipalities with Highest Home Price Appreciation in Past 10 Years
Over a 10-year period from 2013 Q1 to 2023 Q1, the cities/municipalities with some of the highest home price gains are Palm Beach ($6 million), Miami Beach ($2.5 million), Lighthouse Point ($1.4 million), Pinecrest Village ($1.3 million) and Coral Gables ( 1 million). To note, prices can be volatile in the coastal markets with more luxury homes for sale. In the city of Miami, the total price appreciation was $400,000, slightly higher than in Fort Lauderdale, at $387,000, and West Palm Beach, at $337,500.(Graph 3)
What this means for Homebuyers: Keep in mind that even if the mortgage payment is higher than the rent, the principal payment goes towards building wealth and that the buyer starts to reap the price gains on the entire value of the home—not just on the downpayment, while investing the same in the stock market yields a return only that downpayment. That is the power of leverage or using borrowed money (mortgage) to purchase the home.
[1] Based on US Census Bureau data and industry rules of thumb, the calculations assume that the real estate tax, insurance, and maintenance account for 5% of the home value (1% for tax, 2.5% for maintenance, 1.5% for insurance).
[2] The median rent from 2013-2019 is the median gross rent from the American Community Survey. The gross rent from 2020 through 2023 is calculated by inflating the ACS figure using the CPI-Shelter for Miami-Ft. Lauderdale-West Palm Beach.
