Is my house an investment?
It is a good asset for reasons that have little to do with price growth — US house prices have historically grown only modestly faster than inflation, and most of housing's competitive return came from not paying rent.
Imputed rentThe rent an owner-occupier implicitly pays themselves by not renting. It is a real part of housing's return and it never appears as cash, which is why owners consistently underestimate what their house has earned.Read the evidence on this → is the part people leave out. Owning removes a large recurring expense, and that saved cash flow, not appreciation, is where most of the historical Total returnPrice change plus income — dividends for shares, coupons for bonds — with the income assumed reinvested. Quoting price change alone understates long-run equity returns by roughly the dividend yield each year. came from. A comparison that counts only the price is measuring the wrong thing.
The costs left out of the other side are substantial too: maintenance, property tax, insurance, transaction costs on both ends, and the mortgage interest itself. A back-of-envelope 'my house doubled' calculation that ignores twenty years of those is not a return.
The forced-saving effect is real and worth naming. A mortgage is an automatic monthly transfer into an IlliquidityBeing hard to sell quickly at a fair price. A house takes months and several percent in costs to convert to cash, which is why it is a poor answer to an emergency.Read the evidence on this → asset, which for many households accumulates more than voluntary saving would have.
When the answer is different
- Leverage cuts both ways. A 20% deposit multiplies a modest price move into a large move in your equity, in either direction.
- Concentration is extreme: a house is one undiversified asset, in one location, usually correlated with the local job market you also depend on.
Put your own numbers to it
Every answer here is general. These are not.
- Contribution projector
What does saving this much a month actually become?
The research this rests on
Each note states its claim, rates how strong the evidence actually is, and lists the conditions under which it fails.
- A house is a good asset for reasons that have little to do with price growth
US house prices have grown only modestly faster than inflation over the long run; housing's competitive total return in the historical record comes largely from rental yield and leverage, neither of which an owner-occupier receives as cash. (moderate)
- Most individual stocks lose money; a few pay for everything
The majority of individual stocks underperform Treasury bills over their lifetimes, and aggregate stock market wealth creation traces to a small minority of firms. (strong)
- Stocks are a bad short-run inflation hedge and the best long-run one
Equity returns are negatively correlated with inflation over horizons of a year to a few years, and positively related to it over multi-decade horizons, so equities protect purchasing power eventually rather than immediately. (moderate)
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Total return
- Price change plus income — dividends for shares, coupons for bonds — with the income assumed reinvested. Quoting price change alone understates long-run equity returns by roughly the dividend yield each year.
- Illiquidity
- Being hard to sell quickly at a fair price. A house takes months and several percent in costs to convert to cash, which is why it is a poor answer to an emergency. Evidence →
- Imputed rent
- The rent an owner-occupier implicitly pays themselves by not renting. It is a real part of housing's return and it never appears as cash, which is why owners consistently underestimate what their house has earned. Evidence →