Buying a home became a key way to build wealth. What happens if you can't afford to?

NPR | By Brianna Scott

Published January 9, 2023 at 5:00 AM EST

Rebecca Bush is trying to keep an open mind about her financial future.

Rebecca Bush started her home search in January of 2020.

"I thought maybe I'll find the perfect house in the next couple of months, and then it will line up with when my lease ends," the 27-year-old says. "Obviously we all know what happened in March."

Coronavirus. The housing market plunged into chaos as a result of the pandemic. Home values increased nearly 20% across the U.S. between September 2020 and September 2021, according to Real Estate Witch. People were in a home-buying frenzy despite the soaring costs. It didn't leave a lot of houses on the market, and low supply of homes continues to be an issue in 2023 despite prices slowly cooling off.

Then came inflation and the Federal Reserve's attempt to combat it, which pushed some interest rates on mortgages to above 7%.

Between the rising interest rates and having to compete with all the cash purchases, Bush was in a bind when making offers on properties in her home of Tennessee.

"Every time I've been beat out by someone who it seems like they're coming in from out of town, the house ends up going for way more than it was listed for – 50, 60 grand more," she says. "And typically cash ... things that I just can't compete with as a first-time home buyer."

A tight home market and high interest rates have left prospective home buyers like Bush feeling locked out – at least for now. But owning a home is still a cornerstone of the American dream for many, and a key way to build wealth. What happens when you can't buy one?

The suburbs opened up after the war

All the money Bush has been saving for a future home is just sitting in her bank account. She's now thinking, if she isn't going to buy a home any time soon, what should she do with it?

"I just kind of wonder if I need to figure out a different place to build wealth," she says. "Is it not in a home?"

"Homeownership has been a central way of building wealth, I would say, certainly all throughout the post-war period; the wake of World War II, when the suburbs opened up," says Chris Herbert, the managing director of the Joint Center for Housing Studies at Harvard University.

Since the war, home ownership has remained a part of the "American dream" for many people in the U.S. — like Moira Rogers.

Rogers is 50 years old and works as a real estate appraiser, just like her father did before her.

"I love real estate appraisal and I love the American dream of home ownership," she says.

Rogers is a single mom to four children, three of whom are her sister's that she adopted. Rogers had been looking for a three or four-bedroom home with a yard in California. But having more than 30 years of experience in the appraisal industry, she had a feeling the housing market would remain uncertain.

Moira Rogers and her family have had to adjust their plans to fit the financial realities.

"It was really difficult to hold back because that American dream and the idea of seeing your kids run into their bedroom, it's really an emotional thing," Rogers says. "I had to bring it back to the core roots, which is if the numbers don't make sense, they don't work."

Rogers moved her family to Alaska, where her sister's kids were originally born, in the hope it would be more affordable than California. It wasn't, and her family now lives in a 600-square-foot one bedroom condo that she bought for under $100,000.

"A closet has turned into beautiful bunk beds that look like they're from a children's book, for the two little ones, the four- and the six-year-old," Rogers says. "So every time they go to bed at night, they feel like they're climbing into their own little fort in a way."

The sole bedroom, which the 12- and 13-year-old share, has just enough space that it can be separated in a way they each have their own private space. As for Rogers, she sleeps on a foldout couch in the living room.

She says maybe when the market is a bit more stable, her family can upgrade to a bigger house. In the meantime, they spend more money on traveling and experiences rather than a huge mortgage payment. Rogers knows her family's home might be unconventional.

"But it is my own little slice of pie and of the American dream," she says. "And it's a beautiful, beautiful slice, that's for sure."

It's also a slice that doubles as an investment, which is helping Rogers and her family build wealth.

Renters have other options for building wealth

Chris Herbrt says that the wealth difference between homeowners and renters is "substantial." For one, homeowners often have higher incomes and thus have the ability to put more money into their savings for other investments.

"The simple math of saying you take out a mortgage and then you pay it down over time means that you have this aspect of forced savings over time," Herbert says. "So not only is your house appreciating in value, but you're paying off that debt over time. So you combine those two things and home ownership has been a great vehicle for savings and for earning a financial return."

Herbert says there are ways for renters to build wealth outside of home ownership, and he points to stocks and bonds as one example. In some cases, this may be a better investment than housing, he says.

"Renters can do well if they are able to put money into those financial instruments. The rate of return on stocks and bonds over the long term has certainly been higher than the rate of return on homeownership," he says.

Still, Herbert is optimistic the housing market will improve in 2023 for those who want to go that route.

"We're probably out of the darkest days now. Interest rates should come down over the next two years," he says. "The other reason for optimism, I would say, is that from a policy perspective, there's a lot of attention being paid to this issue right now."

Herbert says policymakers and leaders in the housing industry — from lenders and realtors to builders — see good reasons why homeownership opportunities should be expanded.

"[They] are looking for ways to do that, looking for ways to provide new forms of credit and other supports to make homeownership accessible to people," he says.

Rebecca Bush, who has put her home search on pause, is still hopeful about owning a home one day. She grew up on a 60-acre farm, so she always imagined she'd have a place of her own one day big enough to welcome people into, and maybe have a few farm animals of her own.

"I still have that dream that maybe I will be able to buy a home," she says. "But right now, I'm trying to be open to the idea that maybe there's something else out there for me."