Is buying a house instead of renting really the best financial decision?
It’s a question that’s frequently debated, with traditional thinking being that renting is akin to throwing money out the window. But there are some good reasons to believe that buying a home instead of renting isn’t as great of an investment as Americans once thought.
“Housing is overrated as a financial investment,” according to economist Alex Tabarrok, an economics professor at George Mason University. He addressed the question of what economists think about buying compared to renting.
“First, it’s not good to have a significant share of your wealth locked into a single asset.” “Diversification is better and it’s easier to diversify with stocks. Second, unless you are renting the basement, houses don’t pay dividends. Stocks do. You can hope that your house will accumulate in value but don’t count on it. Indeed, you should expect that as an investment your house will appreciate less than does the stock market.”
Owning a home makes it harder for many people to change locations for new job opportunities, leading to homeowners holding onto homes even while prices fall.
Still, Americans don’t seem to be giving up on homeownership yet.
Of course, there are some benefits to homeownership. Many people simply enjoy interior decorating and entertaining. And perhaps more importantly, home ownership is often tied to access to better public schools. The U.S. tax code also subsidizes houses.
Still, he cautioned against the seduction of a large home. “Behavioral economics tells us that we quickly get used to big houses, but we never get used to commuting,” he wrote. “So when you have a choice, go for the smaller house closer to work.”