Apr 19, 2024
A recent study found 94% of U.S. residents believe homeownership is part of the American dream. Are they getting it wrong?
Morgan Housel, a partner at The Collaborative Fund and best-selling author who studies the psychology of money, has sharp counsel for buyers who believe homeownership lights the path to wealth. “Run for your life,” he warns. “Don’t do it.”
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It’s not that Housel is against homeownership. Buyers seeking space, stability, quiet, or a garage for their car can certainly take advantage. But if you’re looking to stack homeownership into a wealth-building portfolio, you won’t like what Housel has to say.
“If you're doing it for financial reasons, you're probably about to borrow a … load of money for an investment that historically has been a very bad investment,” Housel said on a recent episode of The Diary of A CEO YouTube channel. “You're going to borrow hundreds of thousands of dollars for an investment that historically has been a loss. That's what you're doing here. Do you feel good about that?”
An essay by Housel penned back in 2016 lays out what he learned from a home purchase that year — one that he says made sense given his growing family’s need for space and stability. But even then, Housel had his doubts. “Twenty years on I suspect it will look like a mediocre financial decision, especially when the opportunity cost of money sunk into the house is accounted. A good rule of thumb is that nothing in need of constant repair and requiring a half-dozen commissioned middlemen will yield superior investing results.”
Housel has a point, especially when you consider a $350,000 home in the U.S. could easily top $800,000 in considerable upfront and total out-of-pocket costs, once you factor in a 20% down payment, higher mortgage rates, property taxes and annual maintenance costs. It’s true that homes in hot markets can be investments — if you’re comfortable living in a near-constant state of sell-readiness.
But do most folks buy homes that way? They make sometimes-emotional decisions to buy because of growing families, proximity to good schools and neighbors, and the space to stretch. Those benefits are real, but they come with significant costs.
What to consider when buying a house
Home buying demands answers to a series of personal questions: Do you have the money? Do you crave urban vibrancy? Suburban tranquility? Rural serenity? Location is pivotal, dictating accessibility to amenities, commute convenience, and community dynamics.
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Family dynamics, as in Housel’s case, play a significant role. Family size, future expansion plans, and specific needs like accessibility features or school district quality all shape the ideal property choice.
Mortgage rates wield immense influence, too, over affordability and long-term financial health. Getting favorable rates through diligent research and financial preparation can yield substantial savings over the life of the loan.
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Is buying a house a good investment?
If you can handle the cost, lifestyle desires may make buying a home a no-brainer. Housel, after all, did exactly that. But he learned a few things along the way, chiefly that the money math doesn’t always math in your favor.
There are other ways, however, to use real estate to your financial advantage.
Real estate investment trusts (REITs), for instance, provide investors with exposure to real estate assets without the direct responsibilities and expenses associated with property ownership. REITs pool capital from multiple investors to invest in a diversified portfolio of income-generating properties, offering potential dividends and capital appreciation. This approach affords investors liquidity, diversification, and professional management expertise, albeit with some degree of market risk.
Other strategies for real estate investment include real estate crowdfunding platforms, which enable individuals to invest in specific properties or projects alongside other investors, and rental property ownership, which entails purchasing residential or commercial properties for rental income generation.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
