MYTH# 8: Buying a House Helps Me Save for the Future

Reality: This is a risky and unwise investment strategy.

Mortgages can work like a forced savings program. Instead of paying rent, you pay your mortgage and build up equity, assuming you stay long enough to cover the costs of buying, maintaining and then selling the house.

But remember, nearly one third of all owners move within five years, before they start building any real equity. But even if you stay, is this really a wise investment strategy? First, it's risky. It's like putting all your wealth in a single stock. Second, over time, you are likely to earn a better return in the stock market (See Myth# 5).

The editors of SmartMoney magazine came to the same conclusion in a February 2002 article. They wrote, “For most of us, building wealth with our residence is a slow and inefficient process, if it works at all. It's especially hard in this era of low inflation, simply because the underlying asset, your home, typically doesn't appreciate very quickly…The fact is, when it comes to outsized returns, equities win walking away."[16]

Reality Check

“Forget what your friends say. Owning a home is hardly the best way to save for retirement. How do we know? We ran the numbers."[17]
SmartMoney, February 2002

NOTES
16. Jersey Gilbert, “Is Your House Really a Good Investment?" SmartMoney, February 2002.
17. Ibid.

Tags: Rent vs Buy