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STOCKS, BONDS, CASH—and a house owned free and clear. For many, that’s the recipe for a financially successful retirement. Our homes represent a central pillar of middle-class status. With a paid-off mortgage, we have an affordable place to spend our old age.
Yet signing up for decades of house payments has become controversial for its high opportunity cost—what you give up to pay the mortgage. Has a home mortgage, with its long, slow road to payoff, fallen from relevance as a central element of retirement planning?
To be sure, it’s been a wild ride. During the George W. Bush administration, well-intentioned federal policies encouraged an expansion of the market for home loans. Bankers and builders responded. Home values rose as lending standards declined and increased demand met limited supply.
Rising home prices served as their own collateral. Borrowers with no cash found zero-down offers containing both a primary and secondary mortgage. The second note, called a piggyback loan, filled the role of a down payment. “No doc” loans replaced earlier underwriting requirements that stipulated borrowers must verify they had income sufficient to support mortgage payments.
These riskier loans were bundled and sliced into collateralized debt obligation (CDO) tranches, considered less risky than individual mortgages since the risk of default was diluted across many loans. These marketable securities also shifted the financial risks of lending away from mortgage originators and onto holders of the CDOs.
This created novel moral hazard for multiple parties, who weren’t subject to the risks they ran. Questionable gain-seeking behavior resulted, such as bankers churning out CDOs to inflate year-end bonuses. Ratings agencies compounded the risk miscalculation by labeling these toxic instruments as investment grade. Out of this came the Great Recession.
In the subsequent global reckoning, the plummeting value of toxic assets cut a path of destruction through the world economy. Many people lost their homes to foreclosure. Financial firms holding mortgages became insolvent, triggering a global liquidity crisis.
Housing prices dropped, in some markets by as much as 50%. Even traditional borrowers, many of whom had put tens of thousands down and made years of payments, found themselves owing more than their homes’ worth.
Some homeowners simply walked away, refusing to pay their mortgage. Others exited their housing debt with short sales—selling for less than they owed—which further exacerbated the crisis. Banks holding mortgages and collateralized debt obligations were endangered.
Many of my students at the time held underwater mortgages and wondered how to respond. Was it ethical to walk away?
Once burned, twice shy. Some now argue for an alternative lifestyle of renting forever. They want to find means, other than homeownership, to save for retirement and achieve financial prosperity. Still, nearly two-thirds of U.S. households remain homeowners.
With the high costs of everyday life, homeowners can be tempted to borrow against the equity in their homes, even when it means their mortgages may never be repaid. With high interest rates, the high initial cost of homes, and ready options for cash-out refinancing, why should a paid-off home remain a primary financial goal?
Perhaps it’s foolish to place such importance on owning a home. Questioning homeownership is common ground for young adults and retirees alike. Uncertainties increased in a post-inflationary era where home values have lately trailed inflation. Factor in the cost of property maintenance and the stress of servicing a mortgage, and homeownership can look unappealing.
Could the housing price boom be over? In some places lately, the interest rate on no-risk cash deposits has been higher than the annual increase in home values. People with working-class paychecks or living on retirement incomes are already stretched thin covering the costs of housing, food and transportation.
A mortgage can push aside many of life’s smaller pleasures. If that’s the case, why not opt for the smallest, cheapest housing possible?
Catherine Horiuchi is retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine’s earlier articles.
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Informative article. However you seem to writing as if buying vs renting is a choice. With the nationwide shortage of housing, esp in markets like Seattle where I live, buying is simply impossible for anyone except the wealthy. A couple of generations are no longer having the option of buying. We need to build a lot more housing to bring supply in balance with demand.
All good comments. On a somewhat different tack, however, we may also want to think about how long we should remain in our owned homes.
I am in my 70’s, living in California, in a neighborhood just outside of one of the recent major fire zones. Our home is safe, but homes only a few blocks away have been razed by the fires.
As with most homeowners, our house is our single most valuable asset. If our house had burned, insurance would likely have paid for most, but likely not all of the cost of replacing it. There is also the issue of the time required to rebuild after a major fire, which from observing past fires, can take years.
The question then is, as much as I like living in my current home, is there an argument for selling our homes as we age in order to reduce our financial risk, as well as the time and burden of having to rebuild?
I agree Catherine with most of what you reported and over my lifetime I’ve found myself on the losing end of a few real estate purchases. Although my dad would agree with you about living as cheaply as possible (I say affordable), he pointed out to me that a house is not an investment, it is a place to live; it provides stability to the family.
I’d add that I’ve been a tenant multiple times and dealing with some of the landlords wasn’t fun. A lack of repairs was a continual problem. Poor HVAC, plumbing problems and other issues, too. “Don’t hang pictures” and other rules meant we were renting a storage space filled with our furniture. As others have commented, it’s a lifestyle choice and I never considered a home or condo (there are some excellent opportunities) to be an investment. Perhaps owning is a forced savings plan. As for prices, etc. “all real estate is local”.I never purchased with an intent of owning for less than 10 years; I determined a break-even and budgeted accordingly. I left anything I purchased in better condition when I sold it than when I found it. In my opinion one must budget and practice preventative maintenance. Decorating is not maintenance.
While homes are currently expensive, we’ve dealt with high prices and high interest rates in the past. One significant difference was a lack of other debt. I purchased my first home in 1978. Prices in my area were increasing at a rate faster than I could save, so I purchased something smaller and a fixer-upper. As I recall the mortgage rate with my 20% down was about 9.5%. Over the next few years I put in a lot of “sweat equity”. A “construction” balloon loan I had in 1984 spiked at about 20% interest; the banks weren’t offering second mortgages. Ouch!
Buying my own home was the smartest money decision I’ve ever made. From the very first month I wrote out a rent check I thought, this is a mug’s game, and I made a goal to buy a home as soon as I could. As it has turned out, I would not be able to afford to still live where I live had I not bought my home (a studio co-op apartment) thirty years ago. Rent on the same space would cost more than three times as much as the carrying costs for my apartment (and my home is now worth almost three times what I paid for it).
I don’t see an owned home you live in as an investment. Instead, it is a lifestyle choice, if you can afford to make that choice. You have to live somewhere. I don’t think it is necessary to make a list of the improvements in one’s quality of life when you don’t share common walls with neighbors, or compete for a place to park your car, or cannot choose what color you want for the room you sleep in. That said, it is possible in some situations for the ownership of a home at least keeping the value you put into the home up with inflation.
The first home I owned was purchased in 1973, a year after I left the USAF. We paid $29,200 for a 3Bed, 2bath 1148sf home in Fremont, CA. While we don’t live there now, the value of that home today is $1.4M. Running some numbers on my HP12C emulator shows a compound 7.88% rate of return. I think this would be similar to an investment in the stock market.
In 4.5 years we sold this home for $62k. We bought another home 3 blocks away for $68k. This 1500sf home today is worth $1.6M. The 12C shows a 7.11% compound return over the 46 years since we bought this home. We sold this home for $92k 18 months after buying it. We had been transferred to Seattle.
We then paid $99800 for a 2500sf home with a mortgage at 11.625% interest. This home is worth around $1.1M or a compound return of 5.39%. Obviously all these numbers ignore the rest of the costs of owning a home. But, inflation since 1980 has averaged 3% per year.
My oldest son lives in the midwest and has owned a home for the last 15 years. It is a nice home, larger than mine, but the value of the home has hardly changed over this period of his ownership. Still rents where he lives have gone up with inflation, while the prices of homes have not. Through home ownership he has stabilized his cost of housing while enjoying the lifestyle benefits of ownership.
Other than the lifestyle decision, the escalating cost of rent is another reason we choose to own.
And all the cool people have HP12 calculators, though I think marks our age, kind of like driving a Cadillac Coup Deville!
We rented our house out while spending several years in Europe. Whilst we have some maintenance work to perform, I very much appreciate that the duration of our stay in our house is our decision and not that of a landlord.
Catherine, thanks for a thought-provoking article. I’ve experienced, or observed, many of the trends you an others have mentioned. In our almost 43 years of marriage we’ve owned 5 homes, and still own 2 of them. We bought our first home in the mid-1980s with an 8%, 3 point mortgage. We were happy to get that. We’ve experienced periods of flat price growth, and rapid price inflation. We bought our first vacation home in 2012 for about 70% of what the previous owner paid in 2006. When we sold that house 7 years later it had only appreciated about 12%. We bought our second vacation home in late 2019. It has appreciated at least 75%, if not more.
In the mid-1980s my brother moved to Baton Rouge, LA. There was a glut of fairly new rental properties at the time, due to a crash in the oil economy. He had his pick of nice townhouses for bargain rents. When his first lease ended he considered moving, so the owner dropped his rent 20%. Houses were selling at great prices, with owners willing to finance. He looked at that but decided not to. A few friends bought homes for 0 down. A few years later when they wanted to move, they couldn’t sell the home for the original sale price. I also saw this with colleagues in the Northern VA area (DC suburbs) after the GFC. Some were stuck with bad purchases, but a few used the opportunity to buy their first home at a bargain.
One of the worst stories I observed was a former boss and colleague who made 5 coast-to-coast moves from CA to NJ for work. CA home prices seemed to swing more frequently and with greater amplitude than NJ. I know folks who used this to buy in low in CA and ride the price up. My former boss had horrible luck and made his moves at the worst possible times.
Owning a home is a wonderful thing, and we’ve enjoyed all our homes. But there is an element of luck that is hard to forecast. This can be especially challenging if your career is subject to geographical uncertainty. I’ve had my job move 70 miles, than to CA, and later to DC. I was able to ride these changes with increased travel, and finding other jobs within the organization. This kept our family stable in an area we knew and liked. But it definitely required some sacrifices.
That variation in the value of your vacation house is crazy.
We do our best, yet as you say luck and external forces (a work-related move, market conditions) play huge roles in whether housing decisions play out positively. As Jonathan has described repeatedly in his own stories, it’s hard to get it just right. He offers more guidance in his 13 rules: https://humbledollar.com/2019/02/house-rules/ and myths here https://humbledollar.com/money-guide/housing-myths/
For many people, housing is the biggest single expense/investment of their lives, and the “home as piggy bank” concept holds an outsized impact on our culture.
You are correct, overall in CA the housing market can be extremely volatile. I’ve experienced two periods where housing prices swung down nearly 50% in a hurry. Prices rise more slowly most of the time, but there are fast upward spells too which creates near-panic in first time buyers. These swings result in oddities that reflect in valuations across neighborhoods decades later. It reminds me of that Groucho Marx quip: “You can get stucco. Oh, how you can get stuck-oh.”
There’s a lot of factors that go into deciding whether renting or owning makes sense for a particular individual or couple. I think the smart thing is to carefully evaluate one’s situation with a realistic view of current conditions and then proceed accordingly. Over time (like many things in our economy) cycles come and go when either buying or renting will make more sense. For my wife and I at this time and place in our lives, it makes sense for us to own our home. As things change, I hope we’ll make whatever decision is then best for us.
We bought our present home nearly 37 years ago. Some of my peers at that time favored buying as much home as you could qualify for, because of expected future price appreciation. My senior partner and mentor suggested I avoid buying a larger, more expensive home than I needed (and invest the difference, I inferred). We took his advice, are still happy living in the same home, and it worked out well for us financially.
The median price of a home in my city was below the national median, both then and now, so my path was comparatively easy. I do not envy young people living in expensive markets looking for a home today. Some have a family member financially able to help them, but many do not.
I grew up in an apartment, my parents couldn’t afford a house until my father was in his sixties even while all my aunts and uncles had houses.
i would never encourage someone to rent in lieu of buying a home even with all the issues and costs involved. I bought a house in 1987 for $159,000 it was underwater for ten years – the mortgage rate was 9-3/4%. While we invested in upgrades, that house is valued at nearly $1,000,000.
Same! I think home ownership remains a good thing, a kind of forced savings to help establish that habit.
Yet if I look at S&P 500 returns since 1987, your $159,000 would have grown to over $7 million in 38 years. (Don’t we regularly see how much money we’d have today if only we’d spent differently long ago?)
Or, looking at an inflation calculator, all things being equal a house costing $159,000 in 1987 would cost $440,000 in inflation adjusted dollars today. That inflation adjusted amount appears to be about what a median house runs today (though the 1987 median house was much less expensive than yours, at $104,000).
Median rents nationwide have tripled from $600 in 1990 to around $1,800 today. Of course we don’t live “nationwide” but in a particular town/city/state. Median rent in California is around $2,400. The cheapest apartment (in a dicey neighborhood) on a bus line near the school where my kid works is offered for $1300, about half their monthly take-home pay. My Arizona lot rent is $542, so I spend time here while they still live at home for now.
Rent or own, housing prices have risen somewhat in line with inflation, and neither increase has beat market returns. With a house, at least after years of payments you have housing equity that’s worth something. With rent all I have is a bunch of receipts. But if I rent below my means and invest the remainder, I create a different tale. Living modestly, saving and investing something, still seems the easiest path to a secure retirement.
And, I think owning a home has value far beyond any financial calculation.
I purchased a home in July 2022. I’m 35 and married with two children. Since then, the home has appreciated roughly 7% annually. Not only does this exceed the return on a money market fund, it is a levered asset so the return is much greater than 7% on the invested capital. Even if you backed out the transaction costs to sell it, I would have earned roughly 60% on the original equity outlay in 2.5 years. True, we had to furnish it and spruce it up cosmetically but these costs are only a fraction of the appreciation we’ve enjoyed. In addition, money market interest income is ordinary income while the appreciation on a home is not taxable up to $500k if you are married. The home is a four-bedroom which is very difficult to find if you are renting and have children. The rent forever idea seems unrealistic if you are looking to raise a family. Lastly, the market in which you purchase the home makes a big difference. I live in the NY metropolitan area where home supply is constrained and my neighborhood is in high demand due to the schools and its strong sense of community. These areas will remain in high demand in perpetuity.
The two words that jump out to me above are “…in perpetuity.” We don’t have that level of certainty about anything. Is it likely that my house, which has been standing in its place since 1931, is likely, with routine care, to keep on going at least until I pass away? Likely, yes. Certain, no.
If you want to play the leverage game, it can be done with investments just as you are doing with your housing. Then compare apples to apples. Money saved and invested is different than money spent. Possibly the biggest “leveraged” investments you will make will be raising your children. You will pour in hundreds of thousands, and the hope is they will earn millions over their adult lives. No less an eminence gris than Milton Friedman talked up the altruism of parents to expend effort toward the success of their family, as something a nation should encourage, and bank on. His ideas possibly play into our national values on housing and family life.
A quibble: You say the return is leveraged. But what about the cost of leverage? If you have a mortgage, that cost is known. If you paid cash for the house, there’s the opportunity cost.
The interest is simply the equivalent of paying rent elsewhere. I’d call that a wash.
To demonstrate further, I researched an equivalent rental home in my neighborhood. There are only very few available to begin with. The cost to rent per month on a comparable home is greater than our interest expense, real estate taxes, insurance and annual maintenance combined. Let’s call that a wash. Therefore, the analysis would only compare the return on the original cost to purchase the home versus the return on a money market fund. There’s also additional tax benefits as I can deduct mortgage interest and real estate taxes on our tax return.
I’m glad the numbers in your neighborhood favor your particular decision, and I certainly have nothing against homeownership. Indeed, I’ve owned homes for the past 33 years. But as lots of folks have discovered, buying a home involves substantial risk and should not be viewed as a slamdunk.
I rented when I was single.
We bought our first condo together BEFORE we got married.
A few years later we bought our ‘forever’ home and started our family. The interest rate was something like 16%. We refinanced a couple of times down to a 15 year mortgage at about 7%. We paid that off in 2008.
Since then we’ve had no mortgage. We sold our ‘forever’ home a couple of years ago right about when I started having issues walking up and down steps.
We bought a condominium for cash with the equity in the house and selling some investments.
No mortgage. But we do property taxes and HOA fees.
I believe that renting vs. owning is an individual choice with no right or wrong answer.
I could afford to buy, but I prefer renting a nice apartment. I like being able to call maintenance when some small thing goes wrong rather than trying to find a handyperson who is willing to come and fix it.
I bought a new house in 1989, with a 30 year mortgage at 10.5% and a two year builder buy down. I bought less house than I could afford. I refinanced after two years for 15 years at 7.75%. I made extra principal payments and owned the house free and clear in under twelve years. I then lived in it for another twenty-plus years, after which it paid the entry fee for my retirement community.
While I had to deal with maintenance, I didn’t have to deal with landlords, rent increases, fellow tenants and their pets, or needing to move. I have no regrets.
[Edited to correct the initial mortgage interest.]
If I tweaked your numbers slightly, my wife and I did much the same thing in 1988. We bought a nice home, but less than we could afford, paid it off ahead of schedule while simultaneously investing the extra cash. I used to do most of the maintenance, but increasingly pay to have it done now that we are in our early 70s. We share the sentiments in your second paragraph. If or when we need to move to a retirement center, the home equity will be useful.
At 1900 square feet our house is certainly no mansion, but it has everything we want, it’s new, efficient, and paid for. We worked and saved hard and are now enjoying the fruits of our labor. According to Zillow it would cost us $2800 per month to rent this place. The combined cost of property tax and HOA fee is only $650 per month, and I’m pretty sure the house is appreciating at a rate that exceeds potential interest income. This house is where we spend most all our lives these days. For us, choosing to live in a lesser place would not jive with our desired lifestyle.
It’s been over 30 years since I was a renter, but I’m experiencing this in real time with my 30-year-old daughter. Yes, the costs of acquiring a home in California are daunting—but so are the costs of renting. Apartment complexes often want enormous income guarantees to rent to someone. I’ve co-signed on several apartments for my daughter where they wanted evidence of as much as five times the monthly rent in demonstrated income—and the rent was $2000! Not that many young adults have that much income, so in comes mom as a guarantor.
There are other downsides. She’s lived in nice apartments, ratty apartments, and rental houses. She has pets. A lot of young adults do these days because they’re delaying or foregoing marriage/kids—the pets are the “kids.” Finding properties that will take pets is challenging. Then there are the landlords/management companies who might do a lousy job of responding to maintenance issues—she’s encountered that a lot.
Finally, especially in the case of rental houses, the landlord might decide to sell or otherwise displace their tenants (e.g., to let family members live in the home). That happened to her in 2021–she moved into a house and within two months, in a post-pandemic hot housing market, the owner decided to cash in. Same thing happened to a co-worker who had been renting a small home with her family for seven years—they had to get out on short notice so their landlord could sell. And here in California, which is (a) expensive and (b) facing housing shortages due to wildfires and other economic factors, being suddenly kicked out of your rental property could really be a problem. It’s even worse to contemplate for seniors, who may have an even harder time being nimble about their housing.
Wow, I guess I had a lot to say about this!
And I hope you will say more in the future. You are among many California parents who’s felt moved to underwrite or guarantee housing for their adult children. More affordable housing is among the reasons my son moved to Wyoming, same for me buying my park model in Arizona. Yet there aren’t nearly enough people leaving, or places being built or refurbished, to create a reasonable housing supply at a variety of price points in the state.
People will say things like “Well, just move to another state where housing is cheaper.” But that’s a tough thing to say to a young adult whose whole life—family, friends, job connections—is in a particular place. We feel some responsibility for having located our kids in such a high-cost area, so we do help. We’re fortunate that we can. But I’m concerned that once we’re retired and our income drops, it may be harder to qualify to be a guarantor the next time this arises. That’s why we have seriously considered buying something modest that she can live in—not because it would be such a great financial move for us but so that she has the stability of having us as landlords.
The 2008 Financial Crisis had a long run up of political malfeasance:
https://georgewbush-whitehouse.archives.gov/news/releases/2008/12/20081221-2.html
Catherine, thank you for a thoughtful article.
Although home ownership often brings challenges and responsibilities—not to mention unwanted expenses— it has been a common pursuit for most of us.
Overall, The experience of having a home is multifaceted, bringing us feelings of love, comfort, safety, community, stability, and belonging.
“In some places lately, the interest rate on no-risk cash deposits has been higher than the annual increase in home values.”
This statement is contrary to what I have been reading. Would you please supply a link to your source.
Thanxs!
The Case-Shiller index is up 3.6% over the past 12 months. Meanwhile, Ally Bank and Capital One are paying 3.8% on savings accounts, while EverBank is paying 4.4%.