One narrative says owning a house is the best way to build wealth, and single-family institutions are taking advantage of America’s middle class. The narrative pushes our society to do everything we can to increase home ownership. This narrative is not only wrong, it’s also recent.
| Year | Avg. annual salary | Avg. home cost | Years of salary to equal home cost |
| 1950 | $3,000 | $7,400 | 2.47 |
| 1970 | $9,400 | $23,000 | 2.45 |
| 1990 | $29,000 | $123,000 | 4.24 |
| 2020 | $53,500 | $295,000 | 5.51 |
It wasn’t until the 1980s that single-family real estate went from being considered a commodity to an investment. It’s ingrained in our metrics. GDP adds imputed rent for home ownership. Our society incentivized and normalized putting multiple times one’s net worth into a single asset— an asset with high maintenance costs and intricate tax consequences.
Who Owns Homes
Higher homeownership rates are taken as a de facto positive thing. Given that, what countries do you think have the highest homeownership rate? Think of the top ten in your mind.
To recap:
There are 94.6M single-family houses in the US, of which 20.1M are single-family rentals. Institutions currently own 3% of single-family rentals. This is only rentals. Over 75% of single-family rental properties are owned by investors who own two or fewer properties.
Over 82.3% of US single-family homes are owner-occupied. If you count all homes in the US, 65% are owner-occupied, while less than 50% are owner-occupied in France, Germany, Sweden, the UK, and Switzerland.
The top ten countries by homeownership rate are Romania, Laos, Kazakhstan, Slovakia, Hungary, Croatia, Vietnam, Cuba, North Macedonia, and China. They’re the only countries with a homeownership rate at or above 90%. This has led to disaster in countries like China with their recent real estate crisis.
Homes as an Investment
The market has massively outperformed the housing market for the last 40 years. If you’re going to put money in an asset and not touch it, the market crushes buying a house.
Dec 1, 1984 S&P 500 was $181 it’s now over $5,000 (27.6x return)
Dec 1, 1984 buying an average single-family house for $68,198, and it’s as of Jan 2024, $397,378 (5.8x return)
Some will say there’s leverage when buying a house. Ok, let’s assume 20% down, 5x leverage. If you take a 5.8x return *5 = 29x. This seems slightly higher than the S&P 500 27.6x return, but it’s not telling the whole story.
Hard Costs of Real Estate Ownership
The calculated ROI above doesn’t account for property taxes (~1.2%), repairs & maintenance (1-2%), homeowner/landlord insurance (~0.3%), mortgage payments, high transaction costs for buying and selling (~6% each time), time spent managing and transacting, HOA fees, and utilities.
All combined, on the low-end, the cost of homeownership comes out to 5% per year. Compare this to the average annual index fund fees of less than 0.1%.
Given the 5% per year holding cost, the 29x return on the house is reduced to 2x. With the annual 0.1% fee, the index fund’s 27.6x return is reduced to 26.3x. The compounding cost of ownership has a massive impact on return.
To further illustrate the point, the S&P 500 has averaged 11.69% since its inception. A $100K investment in the S&P 500 in 1928 would be worth over $55 million today. The same $100K investment in the average US house would be worth $1.1 million.
Owning vs Renting
A typical rule of thumb is the price to rent-ratio. For example, if a home costs $300,000 and the annual rent for a similar home is $15,000, the price-to-rent ratio is 20. If the ratio is below 15, it’s likely better to buy, and if it’s above 20, it’s better to rent. However, that doesn’t tell the whole story.
The major upside of owning a house is paying a mortgage instead of rent to build equity. This can be true, but you have to stay in the same location for an average of 6 years to pay off the interest of a 30-year mortgage. Until six years, you’re paying interest, not building equity. After around six years, you’re building equity.
The tradeoff is you can’t move to keep this benefit. Lack of mobility is a huge cost, forcing the labor pool to stagnate.
Purchasing a home is a massive, illiquid, and hyper-localized investment. While both asset classes are vulnerable to catastrophic system failures (i.e., the economy failing), real estate is more vulnerable to hyper-localized impacts like new state/municipal laws, property taxes, and neighborhood changes.
A portfolio of large assets is better organized to defend against these factors. Selling a security is easier than selling a house. The entry and exit prices of securities are far lower and have minuscule transaction costs compared to the massive costs associated with real estate transactions.
Owning vs renting is ultimately a personal choice. Owning real estate is one of many ways to build wealth. On an individual investor level, it’s one of the more arduous ways to do so.