America's renter generation is trying to build wealth by investing in stocks instead of owning a house

By Jillian Berman and Venessa Wong

They have a new wealth-building script they are following - that doesn't include owning a white picket fence.

More young Americans, like Dan and Natalie Slagle (left) and Josh Radman, are choosing to rent longer and direct more of their money to stock investments.

Natalie and Dan Slagle felt ready to start looking to buy a home after a few years of renting in Portland, Ore. As financial planners, they ran the numbers and decided they could afford to spend about $6,000 a month on their mortgage payments, or around 20% of their income. That put them at a purchase price of about $940,000.

But the houses they saw even at that relatively high price were lacking - one didn't have a finished basement, another needed work on the HVAC system. They submitted two offers and were outbid.

"We just kind of sat down with this, do we really want to be homeowners right now? Or did it just feel like the world is telling us we should be," Natalie Slagle, 35, said. "This feels harder than it needs to be."

The couple called off the house search and decided to keep renting. Paying $4,000 in rent each month, about 33% less than their mortgage payment would have been, also allows them to put more money into another financial asset - their financial-planning business. They took the money that would have been spent on a down payment and used it to make a larger contribution to their daughter's college savings account, purchase new furniture and bolster their cash balance on hand. They are also maxing out contributions to their retirement accounts and investing money in their brokerage portfolios.

"We're constantly going back and forth making sure that regardless of whether we rent or own, we will be financially sound from now until our final days," she said.

A renter generation is emerging in America, composed of younger people who are renting longer and structuring their financial lives without the traditional pillar of home ownership. Many are keenly aware of the pivotal role that home ownership played in building the financial well-being of their parents and the American middle class. They are letting go of the view that home ownership is necessary for financial success and trying to thrive by writing a new script to building wealth that provides ample room for saving and investing.

Renter households earning at least $175,000 (placing them in the top 20% of Americans by income) grew by 1.2 million over the past decade, according to data shared with MarketWatch by Harvard University's Joint Center for Housing Studies. Many of these households could get a mortgage, but they are also well-positioned to take advantage of a moment in which typical rents are now lower than mortgage payments for listed homes across the country, the result of skyrocketing home prices during the pandemic and rising interest rates in the years since.

The median home price is now five times the median household income, according to the Harvard housing studies center, much higher than in the past.

However long this dynamic lasts, disciplined renters have an opportunity to spend less on housing each month than they would have if they'd bought a home, and invest the difference plus the down payment in the stock market, which has produced higher average returns than real estate whether looking back 10 years, 50 years or nearly 100 years, according to calculations by Aswath Damodaran, a professor at New York University's Stern School of Business.

Because housing has become such an unaffordable asset, wealth experts are now pointing to more accessible ways to build net worth than home ownership.

"We have a dearth of affordable assets that people can purchase, but there is nothing easier to access than financial markets" right now, Steven Brown, director of insights and evidence for the Aspen Institute Financial Security Program, told MarketWatch.

"Historically, homeownership has been held up as this primary asset to establish independence. In order to achieve the American dream, in order to set yourself up for life, it was one of those goals that you were supposed to reach for" as a young adult, Brown added.

Since 2000, the median sale price of homes in the U.S. has grown by about 3.7% annually. The stock market's benchmark index, the S&P 500 SPX, has grown at more than double that rate, at 8.3% when reinvesting dividends, during that time.

"The accessibility of investing in the market, and recent returns, are really encouraging and powerful tools" for young people to build wealth, Brown said.

The strategy comes with risks, experts say, including putting money in a stock market that by some traditional measures is expensive and priced in a way that assumes many companies will perform flawlessly.

Home ownership also usually comes with mortgage payments that create a forced-saving mechanism, gradually building equity in the home. It is not as easy to replicate this dynamic with stock-market investing. An automatic investing plan that withdraws cash periodically from a bank account to invest in the stock market is a powerful tool, but the withdrawals can more easily be circumvented, and the investment account liquidated, if spending needs or desires accelerate.

Still, the view that deteriorating housing affordability has made it more attractive for young Americans to build net worth in assets other than housing is proliferating. It is being fueled in part by prominent financial influencers promoting the idea that investing in the stock market is a better way to build wealth.

On the "Money For Couples" podcast, host and New York Time best-selling author Ramit Sethi often talks about how he has chosen to rent for the past two decades, even after he became a multimillionaire. "I have made more money renting than I ever would have owning a house," he said in a recent video.

'There's a skill set related to renting'

Kristy Shen and Bryce Leung said to succeed financially, renters need a system of forced saving and investing.

Brennan Drolet, a senior at Endicott College in Massachusetts, has determined that home ownership is not his top financial priority as he begins his life as a young adult.

Drolet has been saving and investing his earnings from various jobs over the past five years, and could soon have enough for a down payment on a small property. He has considered buying a home as an investment property one day, but "I don't see it right now," the 21-year-old told MarketWatch.

Drolet, who is interning for the CFO's office of a nonprofit in Dublin, Ireland, is currently more interested in growing his investment portfolio than becoming a homeowner. Real estate is a more stable investment, Drolet said, but housing is expensive now and so far his financial investments have been performing better than the housing market. When he graduates, he will need to be a strategic renter.

Kristy Shen is a Canadian millennial who retired in her early 30s with a CAD $1 million portfolio that she amassed together with her husband by maintaining a high savings rate while renting.

"One of the biggest reasons why people think renting sucks is because they're not being strategic about it," she said. "There's a skill set related to renting."

Often, owning a home is seen as a "forced savings plan," Shen said. But what most people miss is that "the actual comparison is not just 'rent vs. own,' it's 'rent and invest versus own,' over time." To succeed financially, renters need a system of forced savings too.

"The strategy for using rent to [build] wealth is to find rent that is appropriate for your income level," said Shen's husband, Bryce Leung. His and Shen's combined net income during their 10-year wealth-building period ranged from CAD $65,500 to CAD $168,680. While many of their friends spent more than CAD $2,000 each month on pricey apartments downtown, the couple kept their rent in Toronto at about CAD $800 per month by living with roommates until they retired.

Shen and Leung credited their decision to build financial assets, rather than home equity, with giving them the financial independence to retire early, and live off their portfolio as digital nomads around the world.

Had they become homeowners, on the other hand, Shen and Leung said their savings would have been tied up in a house, and they would have been locked into a mortgage that required them to keep working for decades.

Since leaving their full-time jobs 11 years ago, their investments have grown to about CAD $3.2 million.

Today, as parents, their strategies to keep their rent manageable include only leasing in large buildings that are unlikely to force them out to sell the real estate (a common issue with small landlords), negotiating with their landlords when rents in their area fall, and being willing to move out if their landlord doesn't budge.

Most people see renting as a disadvantage, Leung said, but "renting below our means allowed us to save a lot."

The rent-vs.-buy math

The wealth-building strategy for renters is straightforward: Choose rentals that cost significantly less per month than the mortgage payment would have been if you had bought, allowing you to save more; then invest it long term. The rental might not be as large or as nice as what you would buy, but that is part of the plan - you are choosing wealth over lifestyle.

Because you aren't saving for a down payment, the key is to invest sooner, and contribute at a higher rate than if you had bought a home using your cost savings from renting. This should amount to significantly more than the 15% to 20% rule of thumb generally used for retirement savings.

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