Homeowners’ Wealth Staggeringly 40 Times Greater Than Renters: What’s Behind the Gap?

It’s well acknowledged that owning a home can serve as a pathway to accumulating wealth and securing a middle-class status for many Americans. However, a recent study sheds light on the various ways renting can place a strain on numerous households, hindering their financial stability and ability to build wealth.

“Challenges such as limited cash flow, minimal savings, and lower credit scores are common among renters, which can obstruct their path to improved financial health,” states the report by the Aspen Institute, a nonpartisan policy organization.

According to the report, certain public initiatives have softened these issues, suggesting that policy interventions could be key. Given today’s tight housing market, such measures may become essential, especially since not as many people might be able to leverage homeownership to build wealth as in previous generations.

The report also points out that a significant number of renters are content with their living situation, citing a Federal Reserve study which found that 57% of renters appreciate the convenience and flexibility of renting, and 36% have a preference for renting over owning.

However, the disparity in wealth between renters and homeowners is stark – renters have a median net worth of just $10,400 compared to homeowners’ $400,000, with home equity making up about half of the homeowners’ worth. This underscores a pressing need to enhance financial security for those who either cannot or choose not to buy a home.

Challenges Faced by Renters in Managing Finances

Having a positive cash flow — where income exceeds all household expenses — is crucial for financial stability and wealth accumulation, argues the report. However, renters face numerous disadvantages:

• According to the findings, half of all renting households spend over 30% of their gross income on housing expenses, whereas less than one-third of homeowners do so. Notably, 27% of renters use over half their income for housing costs.
• In 2023, 54% of homeowners reported incomes higher than their expenses, compared to only 39% of renters.
• Renters at all income levels tend to save less and have been cutting back on their spending recently due to the rising costs of essentials like food, gas, and housing.
• As of 2022, just under half of renters owned assets that could appreciate in value, such as retirement accounts or stocks, in contrast to over 78% of homeowners.
• Approximately 18% of renters had a late payment on debts in 2022, a rate about twice as high as that of homeowners. Renters also tend to have higher debt-to-income ratios and are more likely to carry student loan debt, which complicates their ability to save for a down payment and qualifies for mortgages.
• Over half of the renter households earned less than $50,000 in 2022, with many living in precarious housing situations, often without access to housing assistance and at risk of eviction.
• Renters generally have poorer credit scores than homeowners; between 2010 and 2015, 84% of renters had scores below 550, while only 27% of those with scores above 750 were renters.
• Rental prices soared by 27% from early 2020 to August 2022, and although they have slightly decreased since, they remain burdensome for many, complicating efforts to save for homeownership. Meanwhile, purchasing prices have escalated beyond the reach of many, forcing renters to rethink their strategies for financial stability.

Paths to Financial Security for Renters

What solutions are available? The report suggests several policy measures to aid renters, including raising the minimum wage, making education and training more affordable, and implementing tax credits aimed at low- to moderate-income families, such as the Earned Income Tax Credit and the Child Tax Credit.

“An increase in the overall housing supply is crucial,” the authors argue, “particularly efforts that boost the availability of affordable rental options.” Programs like housing vouchers can support some of the most vulnerable groups.

Enhancing existing programs like workplace retirement savings plans can also help those without home equity accumulate wealth. Furthermore, easing the transition from renting to owning through increased availability of starter homes, relaxed credit requirements, and stronger down payment assistance programs is also beneficial.

“For a robust and thriving nation, it’s essential that all its citizens have access to the opportunities and resources necessary for wealth creation, whether they own or rent their homes,” the report concludes.