Economist: Buying a house is a bad investment

Yet another economic analysis says that if return on investment is the issue, you'd do better in the stock market.

By Teresa at MSN Real Estate Jul 11, 2011 10:35AM

© Robert Llewellyn/CorbisAn analysis of home-price data for the past 30 years in California indicates that the average single-family house is not a good investment, economics professor Robert Bridges writes in The Wall Street Journal.

He offers this analysis, using the value of a median-price single-family house in California: From 1980 to 2010, the value of the house rose an average of 3.6% per year, so a dollar used to pay the house in 1980 would have grown to $5.63 by 2007 or to $2.98 by 2010, after the bust. If you had invested  the same dollar in the Dow Jones Industrial Average, you would have had $14.41 in 2007 and $11.49 in 2010.


Or, he says, if you had invested your $19,910 down payment plus homeownership costs that exceeded the cost of renting in stocks, you would have had a portfolio worth $1.8 million in 2010, compared with a house worth $296,820. The Wall Street Journal has a chart comparing the Dow Jones index and the median price of a California home over the years.

"Owner-occupied homes will always be the basis for healthy and stable neighborhoods," writes Bridges, aprofessor of clinical finance and business economics at the University of Southern California's Marshall School of Business. "But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."


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The glorification of homeownership also has implications for the larger economy. Bridges writes:

In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications. It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We've diverted capital from more productive investments and misallocated scarce public resources.

Not surprisingly, Bridges' article drew a lot of comments, more than 200 in less than a day, and commenters were predictably split on whether they agreed with his analysis.

Many commenters noted that timing, leverage and psychological factors can tip the scales toward ownership. Randall Dodd wrote:

The author obviously thinks like a statistician rather than a psychologist, and from a statistical standpoint, he makes a reasonably compelling case. The point of his comments might also be summarized as, "Timing is everything." 

Regardless, unfortunately, most Americans don't have the discipline to make monthly contributions to a retirement account because the consequences of not following the routine are so far in the future. Whereas, the consequences of not paying one's mortgage — historically anyway — have been immediate, and severe. 

So when one factors human behavior and shortcomings into the equation, it's difficult to argue with the "forced savings account" homeownership represents, even if a like amount of money invested in the stock market will most likely yield a bigger return.

What's your view? Is buying a home a good investment? Even if you could theoretically make more money in the stock market, is buying a home a better choice?

Oct 2, 2012 4:59PM
His points make no sense.  Assuming you need a place to live, take the NPV of your down payment and mortgage payments over your life versus rent (with escalators), and do the math yourself.  Today buying makes more sense in most places, though this can flip flop.  Alternatively you can comp the expected return on a SF home to a real estate index, but you have to adjust for leverage in the index and your own leverage to determine your own expected return.  Regardless the DJIA isn't the right comp to your home.
Aug 23, 2011 5:53PM
Clearly you didn't pay attention! The article was about buying a home as an investment, not to live in as opposed to rent. Obviously, everyone knows that owning is better than renting for your living space. The are referring to a home as "an investment", to make money on. Learn to read before you write silly, immature comments!
Aug 23, 2011 4:03PM

Homeownership is not a good investment?? SERIOUSLY?? Conversely, I suppose paying a landlord a monthly fee to RENT a home or apartment is a GREAT investment! When I read these silly articles I have to wonder what the authors are smoking.


As a renter, I dumped approximately 51K into my landlady's purse over a 5 year period, for a place that flooded regularly, was dark, dusty, unsecured and NOISY. These days the costs of renting are RISING and the amount of creditworthiness and credibilty you have to present to a landlord are increasing as well. When I acted as property manager and leased out a house recently, the competition for this dwelling (all fixed up on the inside -- NOT!) was heavy.


As an owner, I pay nearly 100$ less a month for twice the space. The place is GORGEOUS, it is peaceful, it is light. And every single time I improve the property, the results belong to ME. Every single time I pay the mortgage, the part that applies to principal is MINE. If that is not an investment, then I don't know what is. And if I pay it off, at least I will have a guaranteed roof over my head in old age -- which is definitely more than a renter can ever say.


Further, when these articles imply that we are becoming a society of renters, they may as well just come out and say that we are becoming a society of SERFS. We are becoming a society that owns nothing, has few, if any rights, and is entirely dependent on those wealthier than ourselves for survival. Land ownership has been one of the marks of social importance since the dawn of time. I don't see that changing anytime soon.


Not a good investment? Crackheads!

Jul 21, 2011 6:05AM
In the last 4 years my rent has increased at about 1.4% per year. All of friends property taxes have gone up more than that. At $870 per month it will be a long time before my rent payment is the same as a $1500 mortgagee payment. PLUS all of the equipment and time it takes to maintain a house and significantly higher utility bills as the house would be larger than my apartment. I have owned multiple homes and they all involve a lot of upkeep costs. Plus there is the added cost of buying and selling a house. The last guy who gets paid is the homeowner and said person is the one taking all of the risk. When you sell a property look at all of those fees that you pay!!!! They seem unending. People need to do what they want with their money and I won't change any ones mind, but in light of all of the unraveling of the nationwide pyramid scheme of residential real-estate in the last 5 years.....buyer beware!!!!
Jul 15, 2011 6:17PM
I'll be honest, I'm not nearly as financially responsible as I should be.  Still, I do not think that some of you are fair with your judgements against people who - sometimes for work purposes, because the job will not pay for it, other times for personal pleasure - have to stay in the loop technology wise.  It's also interesting how some of you who are judging are not my age (early 30s) or younger.  You are older people who took great advantage of a better economy, lower prices, and perhaps it's fair to say a more relaxed atmosphere in both career life and personal life.  No, I didn't live your lives, but the truth is that the economy was - with it's ups and downs - not as catastrophic in its impact on the group as a whole.  Things are just different, and in no way does a 1980 analogy even compare with today.  I do agree, and I need to learn:  be more responsible with your money.  This still will not save anyone from something horrific, if it happens - and something horrific is going on right now, more than ever since 1930s!  I just feel that people are not thinking on the same wavelength.  I know for me, I'm trying to make a better today and tomorrow so I can help others.  I have to take care of myself, but I will not sacrifice others for myself.  I may ask for help, but if someone can't give it - they can't, and I understand that.  This is all I can say with some authority about any financial situation.  We're in a bad spot, and no one except those from the 1930s would understand, most likely.
Jul 13, 2011 7:29AM

Let's see with numbers how renting actually compares with owning.

If I were to rent a ~2000sqft house I would pay roughly $2000/mo in my area.

A 2000sqft in the same area can be bought for roughly $350,000. Taxes are close to $6000/yr.

With a lousy 5% interest rate the payments would be some 1880/mo + 500 tax = 2380/mo.

Property tax and mortgage interest are deductible - and itemizing makes sense, resulting in even more savings. Suddenly the owned property is cheaper than the rented property - and a chunk goes towards the principal.

10 years down the road the renter would likely pay 3000/mo while the owner would still net roughly 2000 (taxes do increase) and have 70k towards the principal.

So who is getting the better deal???


Of course there is the other side - if someone buys a house for 2-3 years then the volatility of the market, closing costs and selling comission would make owning a bad deal - but for someone who is ready to settle down and live 10+ years in a house owning is by far the best.

Jul 13, 2011 5:08AM
I wonder, does this economist put his own money where his mouth is? Does he  rent his home vs. owning it?  How stupid can you be to only look at home ownership purely in terms as dollars and cents.  If you are someone that moves often because of career reasons, then maybe a home purchase isn't viable until you can settle there for awhile. A house purchase should always be viewed as "I'm buying a place to live and raise my family".  Paying mortgage/maintenance instead of rent, even if your house's market value is less than when you bought it (highly unlikely after 30 years), once it is paid off,  you have a roof over your head for life AND you'll still be able to sell it and pocket some major cash.  A lifetime renter only has more rent to pay until the day he dies and nothing contributing to their net worth. So, people need to stop looking at houses soley as piggy banks.  
Jul 12, 2011 5:32PM

Home ownership is an excellent investment when done correctly.  Some of the reasons home ownership is an excellent investment are:

  • A person/family has to live somewhere whether it be renting or owning.
  • Paying rent is generally more expensive than paying the interest on a home loan
  • Interest paid on a home mortgage has the added benefit of being tax deductible
  • Generally a home will be paid off when you get to retirement age.  Once retired an individual wouldn't have to adjust retirement income for the rising cost of renting (generally trending with inflation).  Rather the retired home owner would only have to account for property taxes, utilities, etc.
  • Once locked into a fixed mortgage a person/family knows what their living space will cost them in upcoming years.  Generally a families gross income will increase over time giving them increased spending/saving capabilities.  Renting on the other hand generally increases over time.

However, home ownership can be a bad investment when not done correctly.  A few potential reasons for home ownership being a bad investment might be:

  • Planning to live in the house for only a short period.  Buying and selling houses in short time frames means the owner has to deal with realtor feas, closing costs, and potential risks with housing market flunctuations.
  • Buying a house above what one can afford.  By this I mean that the individual/family is not able to put money into savings and retirement funds at an appropriate rate.
  • Purchasing a house too far from work.  This can add strains due to fluctuating costs of fuel, accelerated vehicle depreciation, etc.
  • Bad luck is another potential short fall of home ownerhsip.  Loss of a job, health issues, natural disasters, etc.  However, bad luck can happen with investments as well.

I am sure I missed some points, but these are the thoughts behind my family owning a home.

Jul 12, 2011 5:20PM

You buy a house to make a home not for financial gain. As @bboop says you are paying repair costs when I elevate your rent in my building. When I redo something in the building I can apply again for a rent increase.

Additionally, with a fixed mortgage I know what my payments are for the next 15 years. Now as people lose houses my rents are going up again. Also, what is it like to be told if you can't afford the rent increase you have to move and return the apt. to it's original condition~at the age of 64?

Can you have your daughter's sweet sixteen in your apt. as you can in your home for memories.

But the biggest point the article missed is the building of wealth through generations. By passing on the property I am supporting my children, grandchildren, etc. Or I am paying for my retirement. Can't do that with an apt..

And just because I own a home who says I don't invest in the stock market?

Jul 12, 2011 3:46PM

Okay. But you can live in a house. Housing is still your biggest expense. Try doing that with your stock market. Renting is a dead-end.


Or did you plan to live in an empty sewer conduit until you can cash in your stock?

The base of all wealth in the United States, lays in land ownership.Umbrella

Jul 12, 2011 3:39PM
I bought my house for a home.  Where I can raise my kids and we can have traditions and memories.  My kids all have their hand prints in the cement on the patio.  My pets that have died have a corner in the yard.  My home is more than an investment for me.  I have been fortunate to have lived in the same house for 26 years, it paid for and if I sell it to downsize someday, then so be it.  It has served me and my family well.  And maybe that's what we ought to be looking for in a house-a home and not an investment.
Jul 12, 2011 3:27PM
If one could rent for free then maybe Robert Bridges would be correct but basically you have two choices, buy your own home or rent and buy a home for someone else.   But obviously if you bought at the peak of a bubble, well.....
Jul 12, 2011 3:15PM

As an owner of rental property, I charge enough rent to set aside for repairs, taxes, AND make a profit.  I'm not in it to be nice to folks.  I have my primary home which renters are helping to pay for.   Improvements are made to keep the property appealing, but as costs go up, so does the rent.  This is a business, folks.  The argument that you don't have to worry about the upkeep is only as true as the fact that you don't pay the repairman directly, but through the amount I charge above the mortgage on that property.


My primary home is just that - a home I plan to always stay in, a place to make memories - just like the old days when a home was where the heart is.

Jul 12, 2011 2:53PM

[Begin Quote] "So when one factors human behavior and shortcomings into the equation, it's difficult to argue with the "forced savings account" homeownership represents, even if a like amount of money invested in the stock market will most likely yield a bigger return. " [End Quote]


I've made this very decision. I bought a home in June 2006. This could'nt have been a worst time. Timing is everything as the article suggests. I've decided though to stay in my home even being underwater. My reason is this. It's like my own personal bet on the USA. My hope is that in time values will return and when they do I'll refinance to lower my payments then, not take a home equity loan. This will further reduce my mortgage payment and living expenses. Currently I'm 38yrs old, but when I'm 65yrs old the house will be paid off and I'll live meager. Americans want it all. Thats part of the problem here. Having a home and a buck in your pocket could be satisfying if that was good enough. I've seen to many people out live there retirement money or drop dead before spending a penny. Maximize your life, not profits...........

Jul 12, 2011 2:34PM
A major part of diversfying your overall investment portfolio.
Jul 12, 2011 1:51PM
When you buy, the interest you pay (most of your payment is interest in the early years) is deductible on your tax return at the end of the year.  When you rent, all you get is a receipt that you can wallpaper your rental unit with.  It does not appear this was factored in, and is probably the primary best reason for purchasing.
Jul 12, 2011 1:00PM
I don't think a house is a bad investment if you are in it for the long haul (like one should be) but I'd personally opt for a duplex or something that could immediately put me in a home and investment property at the same time. Once you add to your family, just rent out both units and move to a SFH. You still have the option to keep getting income from the duplex or you can sell it and use the money toward your home.
Jul 12, 2011 12:52PM
Being sick of paying rent, I bought a house in 1980 when I was 25 years old for $50K.  I lived in the house for 23 years, and sold it in 2003 for $140K.  It nearly paid for the house I bought when I moved to another state.  Now, at 57 years old, my long-term job has gone away, a casualty of the bad economy, but my house is paid for and I have no debt.  I'm sure glad I bought a house when I was young and now have a paid-for home.  Otherwise, I would still be paying rent (or living in my car) rather than owning a house.  I have also saved all my working life for my retirement, and even if I never work another day, I can pay my bills, live in my own house, and not be eating cat food by candlelight waiting for my Social Security check like so many people out there who lived for the moment and never planned for anything.
Jul 12, 2011 12:40PM

If two people each make a $1000 a week and each are putting out about 30% on a place to live whether they rent or own. Wouldn't they both have a bout the same to invest.  Either way they have to put a roof over their heads. Let's say each of them invested 20% of their income after housing expenses, the home owner wins. They have home paid in full in the end, no more rent due and the stock market investment of 20% as well. I don't get your math.

Jul 12, 2011 12:18PM

Thanks for the boost, Teresa.  I'm in the process of buying a second home because the pendulum has swung too far in the other direction.  Here's how it works for me: I get a nicer home for less than I owe on my current house.  I rent out my current house and get someone to pay the mortgage on it.  My net outflow does not change but now I own two homes instead of one.  Oh...and I also continue to put money aside toward retirement.  Run the math on that one.


Please keep writing articles like this so that the lemmings in this country can continue driving home prices down further.  That way, I can buy another one in two years.  Rents are projected to increase 4-5% per year in the near future.  I guess that's my hedge for inflation now, isn't it?

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