- Tom BrezsnyMore of the Housing Conversation…
Continuing…we’re talking about all those tall buildings going up around town and how the conversation around “growth” is changing…and the huge gaps that opened up over the last forty years as the housing crisis deepened and more people were falling between the cracks.
Until, in recent years, SC has earned the dubious distinction of being the #1 most expensive place to rent and the #2 most expensive place to buy in the country. Looking around, it’s not hard to spot the winners and losers in the local housing lottery.
There’s a significant divide between the haves and have-nots almost everywhere you look: owners vs renters, aging baby boomers vs. younger millennials, high net worth vs. low income, first-time buyers vs. downsizing seniors, north county vs south county, single person households vs. struggling families, market rate vs. affordable, 2nd homeowners vs. renters, air b&b properties vs. long term tenants.
Struggling millennials are being left out of the equation at the same time aging boomers, who are long tenured homeowners, are banking lots of equity. Millennials make up the largest share of local renters, in a place that has some of the highest rents in the nation. The odds of most being able to save enough for a downpayment on a home where the median price is $1.3 million, lie somewhere between slim and none. Welcome to Santa Cruz’ “OK Boomer” moment.
Why is homeownership such a big deal? Every study on the planet, from Federal Reserve data to census surveys to decades of economic research tells us that the net worth of homeowners is exponentially higher than that of renters. It’s not just that a person has to be wealthy to buy an expensive home, it’s that owning a home is key to building wealth over time. Here’s how:
Mortgage payments are savings mechanisms that help people leverage valuable assets. Over time, those assets go up in value, particularly in supply-constricted places like Santa Cruz (values have doubled since 2015).
Fixed mortgage payments stay the same while rents go up. And mortgages can be refinanced when interest rates fall. Owners can also borrow against their equity when they need it for things like college tuition. And homes are also the most common asset passed down to children in intergenerational wealth transfers.
If that isn’t enough, homeownership also comes with built-in government subsidies in the form of tax benefits like mortgage interest and property tax deductions, step-ups in basis, 121 capital gains exclusions and options for 1031 deferred exchanges. And…the cherry on top of it all in California is Prop 13, which rewards longer tenured homeowners with lower property tax payments on their appreciating assets.
Next Week: How homeownership builds wealth for generations.
