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Why Buying A Home Is Not A Good Investment (It’s A...

One popular housing mantra that almost everyone is familiar with is “location, location, location.” This quote, often attributed to a British real estate tycoon named Lord Harold Samuel, has been used to express the notion that there is only one thing that is important when investing in real estate, and that is location. As home equity is the largest asset for most Americans, far outpacing average investable assets for most people, the 6.2 percent annual return should be welcome news. While the stock market might represent a better short term return, most people would list their home as a safer asset than market investments. Returns for market investments need to be higher than safer assets due in part to their higher volatility and risk. So, if the home is a safe asset, it might still be a good investment. Individual housing tends to be a risky investment with poor returns, but it does appreciate over time, leaving many people to believe it was a good investment. Despite research showing that housing is not a great investment and that renting may be better in some situations, homeowners tend to grow wealth faster than renters. So, purchasing a home still appears to be a good decision for many people, in spite of all the information showing the benefits of renting, the risks associated with homeownership, not to mention homeownership providing a poor investment return. But why does homeownership outperform renting and investing? While homeownership is unlikely to be a good investment since individual homes tend to be very risky and provide almost no real returns, buying a home does secure housing services and helps create a forced savings opportunity, which is beneficial to accumulating wealth even though the savings is not providing a high rate of return.