Calculating his money for buy a new house or renting.
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A century of data makes one thing clear. Buying a home can build stability and long-term wealth, but not because prices reliably soar. The real financial engine of homeownership is forced savings, not investment returns, and buyers who misunderstand that distinction often take on risks they never intended.
The bottom line is simple. Buy a home because you need stability and a place to live, not because you expect it to make you rich.
The long-run data on housing returns tell a far more modest story than the one presented by real estate marketing and popular belief.
Here is the core inconvenient truth of residential real estate as an investment: once you strip out inflation, the long-run return is remarkably thin.
Nobel Prize-winning economist Robert Shiller of Yale documented in his landmark book Irrational Exuberance that U.S. home prices in real, inflation-adjusted terms show a strong tendency to revert to their 1890 level. His data, updated annually and maintained on his website, reveal that homeowners consistently overestimate how much their homes have appreciated. U.S. Census surveys since 1940 show that homeowners believe their homes have appreciated 2% per year in real terms on average — but the Case-Shiller index, the most rigorous measure of repeat-sales price changes, shows the actual figure is closer to 0.7% annually over that interval.
The post-pandemic years were a stark outlier. National home prices jumped 18% in 2021 and another 11% in 2022 — compressing roughly a decade of typical appreciation into two years, driven by pandemic-era demand, near-zero interest rates, and collapsing inventory. According to the Federal Housing Finance Agency, prices rose 5.4% in the fourth quarter of 2024 compared to the same period in 2023, a deceleration from those extreme peaks. The inflation-adjusted Case-Shiller national index peaked in 2022 at its highest reading on record and has since declined, though it remains historically elevated.
What does this mean in practice? Since 1963, the average nominal sales price of a home has increased by more than 2,000% — from about $18,000 to $417,000 in 2024. But most of that gain is inflation. Adjusted for price changes, the gain per square foot for new homes was only about 20% over the roughly 45 years from 1978 to 2023 — and that modest real gain must be weighed against the fact that new homes today are dramatically larger and include far more amenities than homes built in the 1970s.
The Federal Reserve's 2022 Survey of Consumer Finances shows that the median net worth of homeowners vastly exceeds that of renters — the average homeowner household has net worth around $231,000 compared to roughly $5,200 for renter households. But economists note that this reflects correlation, not pure causation: wealthier people are more likely to own homes, and homes are held by people who have already been savers.
Economists Laurie Goodman and Christopher Mayer, writing in the Journal of Economic Perspectives in 2018, found that homeownership builds wealth primarily through what they call "forced savings" — the mandatory principal paydown embedded in every monthly mortgage payment — plus leverage and tax advantages, not through home price appreciation per se. The wealth only accrues to those who maintain ownership long-term and do not extract equity.
That last condition is harder to meet than it sounds. During the housing bubble years of 2003 to 2006, Federal Reserve research shows that American homeowners extracted more than $800 billion in home equity through HELOCs and cash-out refinancing — much of it used to finance consumption spending on cars, vacations, and credit card debt repayment. When prices fell, these homeowners were left underwater, holding consumption debt against an asset that had collapsed in value. The equity that was supposed to be a retirement cushion had been spent.
The transaction cost problem compounds the risk for those who sell too soon. On an $800,000 home, realtor commissions of 5–6% plus closing costs represent $48,000 to $64,000 in round-trip expenses. Even in a flat market — and over the past 50 years, extended periods of flat or declining real prices have occurred — a homeowner who sells within a few years is virtually guaranteed a loss. Transaction costs alone can consume years of modest appreciation.
Economists Marjorie Flavin and Takashi Yamashita argued a fundamental problem with homeownership as a wealth-building strategy: it forces households to concentrate their wealth in a single illiquid, leveraged asset in one geographic market — the opposite of diversification. Their research showed that the optimal level of housing from a portfolio perspective is often far lower than what homeowners actually hold. In practice, homeowners are over-invested in housing, leaving them with less capital available for diversified financial assets like equities, which have historically produced higher risk-adjusted returns than housing over long periods.
Subsequent research has confirmed that the higher the ratio of housing to total net worth, the lower a household's stock market participation. For the median American homeowner — for whom home equity is the largest single component of wealth — this means that the forced savings mechanism of homeownership may come at the cost of participation in financial markets that have historically delivered superior risk-adjusted returns.
None of these means homeownership is irrational. For households who struggle to save, the forced savings mechanism of a mortgage is genuinely powerful. Every monthly payment chips away at principal; every year you own the home; you own more of it. You can put in your own sweat equity. A landlord can’t kick you out, and its hard in some markets to get decent rentals.
Unlike contributions to a brokerage account or 401(k) — which require self-discipline and active decision-making — a mortgage payment is automatic. Miss it, and you lose your house so Yu usually don’t miss it.
The leverage, while risky when prices fall, has produced real wealth for millions of Americans who bought in growing markets and held for decades. Consider the households aged 55 to 64, the prime pre-retirement cohort: according to the Federal Reserve's 2022 Survey of Consumer Finances, the median net worth of homeowners in this age group is substantially bolstered by home equity — with homeowners holding dramatically higher net worth than non-homeowners in the same age range. That gap is the product of decades of forced savings, leverage, and — in favorable markets — genuine price appreciation.
The research from Goodman and Mayer also shows that homeownership is financially superior to renting for most households over long holding periods — particularly when the full value of federal guarantees (which lower borrowing costs), the implicit benefit of living rent-free in your own asset, and the option value of leverage are accounted for.
But just looking at the issue from a personal point of view buying being better than renting depends critically on:
1. The mortgage interest deduction is largely a myth for most buyers. After the 2017 TCJA, fewer than one in ten filers claims the mortgage interest deduction , and for most median-income buyers of average-priced homes in most states, the deduction provides zero marginal tax benefit. The standard deduction is simply larger.
2. Your state matters more than your income. a median-income couple and an upper-income couple buying the same $800,000 house receive identical federal mortgage interest deduction benefits — because both land in the same 22% tax bracket. the real differentiator is state and local taxes: the same purchase generates a combined mortgage interest deduction benefit of $4,907 in Texas versus $9,446 in new York city.
3. Real home price appreciation is remarkably modest. After inflation, the national Case-Shiller index shows long-run real appreciation of less than 1% per year going back to 1890. Homeowners consistently believe they've made more money than they actually have in real terms.
4. The HELOC trap is real and common. During the bubble years of 2003–2006 alone, American homeowners extracted more than $800 billion in equity — much of it for consumption spending. Every dollar extracted resets your forced savings clock and increases your leverage. Homes are savings vehicles only if you treat them as such.
5. Homeownership is a forced savings plan, not an investment. The honest case for buying a home is not that you'll get rich — it's that most Americans have difficulty saving voluntarily, and a mortgage forces them to save monthly. Combined with government-subsidized leverage and tax treatment, that's a reasonable deal. Just know what you're actually buying.
The deeper issue is not whether individuals should buy homes. It is that the United States has built a wealth system that relies on housing as its primary savings vehicle for the middle class. That system produces uneven outcomes, weak retirement security, and large exposure to local market risk.
If we want broad-based wealth, we need institutions that build it directly —retirement systems, guaranteed savings and income security — not just leveraged bets on housing markets.
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