Why Real Estate Is a Bad Investment

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 If you use the geometric average, which is the compounding one and therefore the one that matters, the gap gets ugly pretty fast:

Important caveat, because this is where the argument usually gets slippery. 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, meaning price appreciation plus rental income, the better peer-reviewed source is Jordà et al. (2019), in the Quarterly Journal of Economics, covering 145 years across 16 advanced economies.³

So even when housing gets the more generous rent-inclusive treatment, U.S. stocks have still beaten U.S. housing by a wide margin over the long run. This is not a small edge. This is the kind of edge compounding turns into a completely different life.

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

The appreciation figure people quote at dinner usually skips the annoying part where houses require money every year just to continue being houses. 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:

The annual carrying cost alone is several times the long-run real appreciation rate of the underlying asset. The headline return exists. It just gets eaten before you get to feel especially clever about 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 This is not a cute little line item. It is a ratchet, and most homeowners cannot opt out.

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 So, okay, the old system got shaken. The round-trip cost is still rude:

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 The same concentration risk that would look unhinged in an equity portfolio gets rebranded as "the American dream" when the asset has a front door.

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, which is very human and also not a return.

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:

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 describe their mortgage as margin, even though the math is sitting right there, wearing a little roof.

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. Calling it an investment muddies the accounting. It is housing that sometimes appreciates, not an appreciating asset that happens to include a guest bath. Assets that yield returns, like equities, bonds, or rental property run as a business, pay you. A primary residence charges you.

But what about...? The objections I would also raise.