HH Buying/Renting Home Vs. Investing In Stocks

The conventional wisdom during the baby boom generation was that buying a house was a ticket to financial freedom. Because policy makers believed in this concept, since the late 90s there was an aggressive attempt to get people into homes they couldn’t afford. Obviously, over leveraging yourself with the purchase of real estate may not be the best idea. You also shouldn’t assume by default a continuation of high price appreciation following a prolonged bull market in housing. Just like in most periods of overvaluation and in instances where bubbles are formed, retail investors assume the best at the worst time. When the economy is doing well, that is the best period to save capital in preparation for an inevitable decline in the economy which happens every business cycle.

Many Americans however, primarily driven by the largest demographic, the millennials, have a less enthusiastic opinion on housing partially because they witnessed the housing bubble crash first hand. Aside from increasing costs of owning a home, this has created a tiny house movement as well as an increase in the number of renters vs owners.

Can You Make More Money Elsewhere?

Millennials and other Americans who would rather rent think putting your money in house which is your primary residence ties up too much of your capital. This is a broad argument which can only be analyzed upon understanding someone’s personal finances. If someone spends a majority of their savings on a down payment, they aren’t diversified. The counter point is if their future earnings are invested into stocks and bonds for a retirement account, they regain diversification – perhaps not this late in the business cycle, but that’s a discussion for a different day. If your goal is perfect diversification, then owning one home would be like having one stock in your equity portfolio. Theoretically, as the argument goes, it would be better to own REITs. However, even perfect diversification is far from a protection against losses.

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