If you want wealth, rent and invest instead of buying a home: Academic study

The Short:

A new study conducted by Florida Atlantic University, Florida International University and the University of Wyoming found that buying a home saves you money, but does not help you increase your wealth.

The Long:

The study notes that “Property appreciation most homeowners expect when buying a home may be relatively meaningless in terms of building wealth.”

“When considering buying and building wealth through equity appreciation versus renting and reinvesting in a portfolio of stocks and bonds, property appreciation does not change the results,” said study co-author Ken Johnson, Ph.D., real estate economist at FAU’s College of Business.

He added, “On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds.

Do we agree?

Yes, the authors certainly have made a strong case. But let’s take a live example and see if it supports the study’s conclusion.

The median sales price for new houses sold in the United States increased from $207,100 in August 2009, during the depth of the great recession, to 319,700 by September 2017.

So, if you had bought a house in August 2009 and sold it in September this year, you would have pocketed a cool 54.36% return on your investment. Not bad.

But what if you had invested in the S&P 500 at the same time? The price of the highly traded SPDR S&P 500 ETF (SPY) increased from $102.46 in August 2009, to $249.98 by September 2017, a growth of 143.97%, far exceeding the return from buying and flipping a house.

QED, methinks.

Read the FAU blog post here

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