Why Real Estate Is a Bad Investment

A plain accounting of what the numbers actually say. Every input is underlined and linked to its source — peer-reviewed research, federal agencies, and primary datasets, not real-estate marketing. Computations are shown, not summarized.

1. Over the last century, U.S. stocks have compounded at roughly twice the rate of U.S. home prices.

Aswath Damodaran maintains the standard 1928–present dataset of U.S. asset returns at NYU Stern, updated annually and sourced from S&P, FRED, and the Federal Reserve.1 Across 97 years, using the geometric (compounding) average:

$100 invested in 1928 → end of 2024 (97 years)// S&P 500, total return, dividends reinvested stocks_cagr = 9.94% $100 × (1 + 0.0994) ^ 97 = $100 × ~9,820 = ~$982,000 // U.S. real estate, Case-Shiller price index (price only, no rent) re_cagr = 4.23% $100 × (1 + 0.0423) ^ 97 = $100 × ~56 = ~$5,600 // ratio $982,000 / $5,600 ≈ 175×

Important caveat. Damodaran's real estate series uses the Case-Shiller Home Price Index, which tracks price changes only and does not include imputed rent.12 To compare total return to total return — price appreciation plus rental income, the way stocks include dividends — the peer-reviewed source is Jordà et al. (2019), in the Quarterly Journal of Economics, covering 145 years across 16 advanced economies.3

Real total return, U.S., 1870–2015 (Jordà et al. 2019)// both figures include income (dividends / rent) us_equities_real = 8.5% us_housing_real = 6.1% // gap, same methodology, apples to apples 8.5% − 6.1% = 2.4 pp / year, compounded for 145 years // compounded wealth gap on $100: stocks: $100 × (1.085) ^ 145 ≈ ~$13.7M real housing: $100 × (1.061) ^ 145 ≈ ~$535K real

Even with the most generous, rent-inclusive total-return framing, U.S. stocks have beaten U.S. housing by a wide margin over the long run.

2. Home price appreciation is the headline, not the return.

The commonly cited appreciation figure ignores that houses consume cash every year to remain standing. Fannie Mae and most financial planners use a 1% to 4% annual maintenance-and-repairs reserve as the standard planning assumption.4 Add property tax and insurance, and the picture looks like this on a typical U.S. home:

Annual carrying cost, U.S. typical home (2025)// Zillow typical home value, Q4 2025 home_value = $362,000 // from 2025 Zillow + Thumbtack analysis maintenance = $10,946 property_tax = $3,030 insurance = $2,003 ───────── total_annual_cost = $15,979 // ≈ $1,325 / month // as a % of home value drag = $15,979 / $362,000 = 4.4% per year // for context: the long-run Case-Shiller real appreciation rate is case_shiller_real = ~0.7% per year

The annual carrying cost alone is several times the long-run real appreciation rate of the underlying asset. The headline return exists; it is just mostly consumed before the owner sees it.

3. Insurance is a structural drag, not a line item.

The U.S. Department of the Treasury's Federal Insurance Office analyzed 246 million policies and found that homeowners insurance premiums rose 8.7 percentage points faster than inflation from 2018 to 2022.8 The Harvard Joint Center for Housing Studies reports that real premiums rose roughly 20% between 2020 and 2023 alone, and 74% since the Great Recession.9 The Consumer Federation of America found premiums rose in 95% of U.S. ZIP codes between 2021 and 2024, with a third seeing increases of more than 30%.10 These costs ratchet up and cannot be opted out of.

4. Selling a home is expensive, and the 2024 antitrust settlement barely moved it.

After the NAR settlement took effect in August 2024, buyer-agent commissions dipped briefly before rebounding, per Redfin's MLS analysis.11 Here's what a typical round trip looks like on a median-priced home:

Round-trip transaction cost, median U.S. home (2025)home_price = $362,000 // SELL SIDE (post-NAR settlement averages) total_agent_commission = 5.44% × $362,000 = $19,693 title + escrow + other = ~1.5% × $362,000 = $5,430 transfer tax (varies) = ~0.5% × $362,000 = $1,810 ───────── sell_side_total = ~$26,933 // ~7.4% of price // BUY SIDE (lender fees, inspection, title, etc.) buyer_closing_costs = 2–5% × $362,000 = $7,240–$18,100 // ROUND TRIP, low estimate total_friction = ~$34,000 on a $362,000 home ≈ 9.4% // years of median appreciation this consumes: median_annual_apprec = ~3.8% nominal break_even = 9.4% / 3.8% ≈ ~2.5 years just to break even

5. Real estate is the opposite of diversified.

A typical homeowner holds one property, in one metro, at one price point, tied to one local economy and one labor market. An S&P 500 index fund spreads the same dollar across ~500 companies across every sector. The Jordà et al. dataset shows housing returns vary enormously by country and period — Japan's real housing returns have been negative for decades.3 Concentration risk that would be considered reckless in an equity portfolio is called "the American dream" when the asset is a house.

6. The "low volatility" story is partly a measurement artifact.

Real estate appears calmer than stocks in part because it is not continuously repriced. Equities are marked to market every second; houses are marked to market every several years, at transaction. Robert Shiller — whose Case-Shiller index is the standard measure of U.S. home prices — has noted that U.S. Census homeowner self-estimates imply a perceived ~2% annual real appreciation, while the actual measured figure is closer to 0.7%.2 The sense of steady growth is partly memory bias.

7. Leverage is a feature that cuts both ways.

A 20% down payment lets a buyer control 5× the asset, magnifying gains. The same leverage magnifies losses:

Leverage math — a 20% price declinehome_price = $500,000 down_payment = 20% × $500,000 = $100,000 // your equity mortgage = 80% × $500,000 = $400,000 // price drops 20% new_home_price = $500,000 × 0.80 = $400,000 mortgage_owed = $400,000 // unchanged equity_remaining = $400,000 − $400,000 = $0 // 20% asset decline → 100% equity loss

From its 2006 peak through 2012, the S&P/Case-Shiller U.S. National Home Price Index fell roughly 27%.15 Millions of U.S. households learned this distinction firsthand. Stocks can be levered too, but most investors choose not to, because they understand it is risky. Most homeowners do not frame their mortgage as margin.

8. A primary residence is a consumption good that people keep calling an investment.

A primary residence produces no income, charges the owner every month to remain in it, and is paid for with after-tax dollars that could have been invested elsewhere. Framing it as an investment obscures the basic accounting: it is housing that occasionally appreciates, not an appreciating asset that happens to provide housing. Assets that yield returns — equities, bonds, rental property run as a business — pay you. A primary residence charges you.

But what about…? Common objections, honestly addressed.

I bought my house for $X and it's worth $4X now. How is that a bad investment?

ResponseProbably inflation, a little appreciation, and the fact that you're comparing a leveraged purchase price to an unleveraged sale price. A $200,000 home bought in 1994 would be worth about $430,000 today just from inflation, with no real appreciation at all.16 Most homeowners also never net out the 30 years of property tax, insurance, maintenance, and mortgage interest they paid along the way. The Case-Shiller real (inflation-adjusted) appreciation rate from 1890 to 2024 is roughly 0.7% per year.2 Your house probably did fine. It almost certainly didn't beat the stock market.

Rent is throwing money away. At least with a mortgage I'm building equity.

ResponseProperty tax, insurance, maintenance, HOA fees, mortgage interest, and transaction costs are also "thrown away" — none of those build equity, and in the early years of a mortgage, interest is the majority of the payment. Meanwhile, a renter can invest the down payment and the difference between rent and full housing cost into index funds that have historically outperformed real estate. The honest question isn't rent vs. buy, it's total housing cost vs. total housing cost plus opportunity cost of the invested down payment. Whether owning wins depends on your rent-to-price ratio, how long you stay, and local appreciation — not on the slogan.

A mortgage is forced savings. I'd never save that money otherwise.

ConcessionThis one is partly true, and worth honoring. For people who struggle to save, a mortgage is a commitment device that converts income into equity whether you have the discipline or not. That is a real benefit. It just isn't a financial argument that the asset is a good investment — it's an argument that the structure overcomes a behavioral problem. The same person setting up an automatic transfer to a brokerage account would come out ahead, but many people don't, and for them, a mortgage may genuinely be the better path. Worth naming clearly.

What about the mortgage interest deduction and property tax deduction?

ResponseMostly not what it used to be. After the 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, the overall itemization rate fell from 30.6% in 2017 to 9.2% in 2021, per IRS data.17 The number of returns claiming the mortgage interest deduction dropped by 59% between 2017 and 2018 alone.18 For the roughly 9 in 10 U.S. households now taking the standard deduction, the mortgage interest deduction provides zero tax benefit. The 2025 One Big Beautiful Bill Act raised the SALT cap from $10,000 to $40,000 (phasing out for incomes above $500,000), which will restore some itemization for higher earners — but for most homeowners, the mid-century tax argument for ownership is a historical one.

Real estate is a great inflation hedge.

ResponsePartly true, partly overstated. Home prices do tend to rise with inflation over long periods, which is a real feature. But the carrying costs — property tax, insurance, maintenance — also rise with inflation, and insurance has recently risen faster than inflation. Stocks also hedge inflation over long periods, with higher real returns, without the concentration risk. Gold, TIPS, and I-bonds are more direct inflation hedges. Real estate works as a hedge, but it's not uniquely or even especially good at the job.

Legitimate reasons to buy a house anyway

None of the above means don't buy a house. A house is a home, and a home delivers things an index fund cannot. Real non-financial reasons to buy include:

These are good reasons. They are just not financial reasons. The mistake is smuggling them into an investment thesis — that's how people end up stretching to buy more house than they should and calling it "putting money into an asset." Buy the house. Just know what you're buying.

Sources

  1. Aswath Damodaran, Historical Returns on Stocks, Bonds and Bills: 1928–Current, NYU Stern School of Business. Dataset maintained and updated annually. Real estate series uses Case-Shiller home price index. pages.stern.nyu.edu/~adamodar
  2. Robert Shiller, Irrational Exuberance (Princeton University Press); Case-Shiller index documentation; U.S. Census Bureau homeowner value self-estimates, 1940–present. econ.yale.edu/~shiller
  3. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor, "The Rate of Return on Everything, 1870–2015," Quarterly Journal of Economics, 134(3), August 2019, pp. 1225–1298. academic.oup.com/qje. Working paper: NBER w24112.
  4. The 1–4% of home value annual maintenance reserve is a standard rule used by Fannie Mae and cited in Bankrate's 2025 hidden-costs analysis. bankrate.com
  5. Zillow, U.S. Typical Home Value, Q4 2025, cited in the November 2025 Zillow/Thumbtack analysis. zillow.mediaroom.com
  6. Zillow & Thumbtack, joint analysis of U.S. homeownership carrying costs (November 13, 2025). Both firms have commercial interests in housing; figures treated as directional. zillow.mediaroom.com
  7. S&P/Case-Shiller U.S. National Home Price Index, via Federal Reserve Bank of St. Louis (FRED). Long-run real appreciation ≈ 0.7%/year per Shiller; nominal ≈ 3–4% in recent decades. fred.stlouisfed.org/series/CSUSHPINSA
  8. U.S. Department of the Treasury, Federal Insurance Office, Analyses of U.S. Homeowners Insurance Markets, 2018–2022, January 16, 2025. home.treasury.gov
  9. Joint Center for Housing Studies of Harvard University, The Insurance Crisis Continues to Weigh on Homeowners (2025). jchs.harvard.edu
  10. Consumer Federation of America, Overburdened: The Dramatic Increase in Homeowners Insurance Premiums and Its Impacts on American Homeowners, April 2025. consumerfed.org
  11. Redfin analysis of MLS buyer-agent commission data, post-NAR settlement (2024–2025). redfin.com
  12. Clever Real Estate, Agent Commissions Edge Higher in 2025, One Year After Landmark NAR Settlement, June 2025. Average U.S. total commission: 5.44%. listwithclever.com
  13. Zillow, How Much Are Closing Costs for Sellers? Title/escrow/transfer taxes typically 2–4% on top of commission. zillow.com
  14. Bankrate, Closing Costs: What Are They And How Much Are They? (February 2026). Buyer closing costs typically 2–5% of loan. bankrate.com
  15. S&P/Case-Shiller U.S. National Home Price Index, FRED series CSUSHPINSA. Peak-to-trough 2006–2012 nominal decline ~27%. fred.stlouisfed.org/series/CSUSHPINSA
  16. U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (CPI-U). Annual average: 148.2 (1994) → ~320 (2025). A 2.16× multiplier on purchasing power. bls.gov/cpi
  17. Congressional Research Service, Selected Issues in Tax Policy: The Mortgage Interest Deduction. Itemization rate fell from 30.6% in 2017 to 9.2% in 2021 following the TCJA. congress.gov/crs-product/IF12789
  18. The Budget Lab at Yale, The Mortgage Interest Deduction: Options for Reform. Between 2017 and 2018, the number of returns claiming the MID fell by 59% and the total amount claimed fell by 40%, following TCJA. budgetlab.yale.edu

Last updated April 2026. Figures reflect data current as of late 2025 / early 2026. Every computed number is derived from linked primary inputs — if any input changes, the conclusions should be recomputed.