Should You View Your Home as an Investment?
First-time homebuyers accounted for 33% of home sales in August 2020, according to a recent announcement from the National Association of Realtors. That’s up from 31% in August 2019. Many of these new homeowners were likely told that their purchase is a great investment—but is that actually the case?
In reality, most people consider their home a wealth-building tool rather than a traditional investment. Homeownership allows buyers to avoid "throwing money away" on rent, but should it be directly compared to investments like stocks and bonds?
To answer that question, we must first consider how the housing market performed over the past year compared to the stock market.
The answer depends largely on location and investment strategy.
Apples to Apples: A Fair Comparison
Before comparing a primary residence to the stock market, several assumptions must be made.
Owning a home involves more than just a mortgage payment—expenses such as property taxes, insurance, and maintenance costs must be considered. However, for this analysis, we will focus solely on the appreciation of the asset.
For stock market performance, we must choose relevant benchmarks. Commonly used indices include:
S&P 500 – Represents a broad mix of large-cap U.S. companies.
Dow Jones Industrial Average (DJIA) – Tracks 30 major industrial stocks but is considered too narrow.
NASDAQ – Heavily tech-focused and can be more volatile.
For this analysis, we will use all three market indices.
Stock Market Performance (September 2019 - August 2020)
While investors cannot invest directly in an index, comparing market trends over the same period provides a useful reference. Though a one-year performance snapshot can be short-sighted, it helps illustrate the comparison to home appreciation.
Here are the returns from September 1, 2019, through August 31, 2020:
NASDAQ: Climbed from 7,906 to 11,761 → +48.8%
DJIA: Increased from 26,198 to 28,133 → +7.4%
S&P 500: Rose from 2,909 to 3,508 → +20.5%
Clearly, stock market performance varies based on the index used, with NASDAQ leading the way, largely driven by the surge in technology stocks.
Housing Market Performance by Region
The National Association of Realtors reported that August 2020 marked 102 consecutive months of year-over-year home price gains. While stock market performance fluctuated, real estate prices demonstrated steady growth. However, appreciation rates varied widely by region:
South: Median home price $269,200 → +12.3% year-over-year
West: Median home price $456,100 → +11.8% year-over-year
Midwest: Median home price $246,300 → +10.7% year-over-year
Northeast: Median home price $349,500 → +10.4% year-over-year
Compared to stock market returns, home appreciation rates appear more stable but are significantly lower than NASDAQ's performance.
What Does This Mean for Investors?
Each homeownership situation is unique, making it difficult to draw broad conclusions. However, several key insights emerge:
Home values have appreciated significantly over the past year, but this is part of a long-term trend—102 months of consecutive gains.
Housing is not immune to market fluctuations. The 2009 housing crash saw median home prices drop by 14%, illustrating that real estate can decline just like stocks.
Median home prices tell only part of the story. Just as individual stocks perform differently within an index, home values vary based on location, desirability, and local economic factors.
Liquidity and costs differ significantly. Stocks are easy to buy and sell, while real estate requires substantial transaction costs and time.
Past Performance Is No Guarantee of Future Results
Both housing prices and stock market indices have outperformed their historical averages over the past year. However, past performance is not a guarantee of future results.
The home price increases seen in 2020 were nearly triple the long-term average annual appreciation rates. Similarly, stock market returns were well above their historical norms. Investors should be cautious in assuming these trends will continue indefinitely.
Ultimately, whether homeownership is a better investment than stocks depends on personal financial goals, risk tolerance, and market conditions. Diversifying between real estate and traditional investments may be the most balanced approach for long-term wealth building.