A house is most certainly not an investment, for one simple reason: you have to live somewhere, and you are either going to have to pay for it or rent it. Always remember, investment is the deferral of present consumption for future consumption, and if anything qualifies as present consumption, it is a residence.

Further if you pay for one in cash, then you are spending capital you could otherwise invest in something else. Even if your home really is not an investment, the Gordon Equation supplies a way of thinking about the decision whether to buy or rent. Here is how it works. Just like a stock, a home or condominium’s price should increase over time. How much? The best data on house prices suggest that, after taking inflation into account, the answer is slim to none. These data focus on historical data from three nations. Real house prices in the United States did not rise at all between 1890 and 1990, while in Norway after 1819 real prices did rise, but only by about 1.3 percent per year. Amazingly, economists have even assembled a series of house prices along Amsterdam’s tony Herengracht Canal going all the way back to the early seventeenth century. These show absolutely no increase in their after-inflation (real) prices for over almost four centuries – and in one of the world’s best neighborhoods to boot. You can thus expect at best a 1 percent annual real increase in price. So far, so good.

Next, just as with stocks, there is the dividend to consider: for a residence, the equivalent of the dividend is the so-called ‘imputed rental value’ of the property. This arcane but important term refers to the fact that your home ‘pays you rent’ every month. In other words, it makes little difference whether you rent a residence from someone else or you own it yourself. If you own the house outright, you are tying up a large amount of capital you could profitably invest elsewhere, and the imputed rent, or use of the house, is your reward for doing so. On the other hand, if you have the ability to pay for a house outright but choose instead to rent, your unspent capital can earn a return in other areas, such as stock and bonds.

The opposite reasoning applies if you cannot afford to purchase the house outright, but instead require a mortgage. By choosing to rent instead of own, you substitute rent payments for mortgage payments. True, mortgage payments, at least early on, are largely deductible, but the advantage is more than offset by the catastrophic risk of default and repossession you take on with a mortgage. Let’s say you are considering purchasing a house costing $300,000 that might reasonably rent for $1,250 per month. This amounts to a 5 percent ‘imputed rental dividend’ ($1,250 per month is $15,000 per year). Unfortunately, you have to subtract about 3 percent for taxes, insurance, and maintenance, leaving you with a 2 percent annual income stream. Thus, at most you will receive a 3 percent real return (1 percent real price increase plus the 2 percent net ‘dividend’) on your home; if the current downturn in the housing prices perseveres, it could be much less. A good rule of thumb is to never, ever pay more than 15 years fair rental value for any residence. This computes out to a 6.7 percent (1/15th) gross rental dividend, or 3.7 percent after taxes, insurance, and maintenance, which is about what you might expect from a mixed portfolio of stocks and bonds. (Imputed rent does have one real advantage over the return from stocks and bonds, which is that it is tax-free).

As we’ve found out during the real estate bubble, your primary residence is not an asset. Your home is just a place to live. I’ll go out on a limb to state it is no different than renting, but with some advantages. Typically, it is recommended to buy a home only if you will live at the same location for five years or more. I suggest an even greater period of 10 years or more. Otherwise, you are usually best to rent instead. Owning a home for 5–7 years is too risky. It is too much equity to have stored in one asset, and it can be difficult to sell when you need to move.

Real estate represents a significant component of most [family] portfolios because many families own their primary residence. Yet while families include homes in their net worth statements, they usually ignore them when they come to think about allocating their assets. Your home represents a substantial asset within your portfolio, but that doesn’t necessarily make it an attractive investment. Purchasing real estate, both primary and vacation homes, should be viewed as both an investment and a consumption decision. While many investments in real estate have historically performed well, they are likely to do poorly in the future for the following reasons: Owning real estate comes with a variety of hidden costs such as maintenance, taxes, lawn care, furnishings, and utilities. Primary residences and vacation homes generate little income but often come with substantial carrying costs such as mortgage payments and property taxes. Real estate is illiquid. It often takes several months to sell, and broker and transfer fees can drain away as much as 7 percent to 8 percent of the total asset value. Over the long run, real estate is likely to appreciate at a rate close to the rate of inflation. In the past several decades, real estate investors in the United States and globally benefited from reductions in interest rates, abnormally high demand from baby boomers, innovation in financing products that dramatically increased the pool of potential buyers, and increased government subsidies through tax deductions and financing support from intermediaries such as Freddie Mac and Fannie Mae. These dynamics are unlikely to repeat themselves anytime soon. Even in the positive environment, house prices increased only approximately 2 percent per year after inflation from 1975 to 2005. Over a longer period (1890–2000) there was little real house price appreciation in the United States. Within a reasonable range of assumptions for inflation and appreciation, real estate returns are likely to be less attractive than equity returns, with less liquidity, more hidden costs, more work, and greater risk of loss.

Americans’ biggest ‘investments’ are their houses, but real estate is also the place where Americans lose the most money. Real estate agents (and most homeowners) are not going to like me after this section, but in truth, real estate is the most overrated investment in America. It is a purchase first — a very expensive one — and an investment second. If you’re thinking of your primary residence as an investment, real estate provides mediocre returns at best. First, there’s the problem of risk. If your house is your biggest investment, how diversified is your portfolio? If you pay $2,000 per month to a mortgage, are you investing $6,000 elsewhere to balance your risk? Of course not. Second, the facts show that real estate offers a very poor return for individual investors. Yale economist Robert Schiller found that from 1915 through 2015, home prices have increased, on average, only 0.6 percent per year. I know this sounds crazy, but it is true. We fool ourselves into thinking we’re making money when we’re simply not. For example, if someone buys a house for $250,000 and sells it for $400,000 twenty years later, they think ‘Great! I made $150,000’! But actually, they’ve forgotten to factor in important costs like property taxes, maintenance, and the opportunity cost of not having that money in the stock market. The truth is that, over time, investing in the stock market has trumped real estate quite handily — which is why renting can be a great decision. I rent by choice! I’m not saying buying a house is always a bad decision. (In fact, I created a sub-savings account called ‘Down Payment for Future House’, knowing that I will eventually buy) it is just that you should think of it as a purchase, rather than as an investment. And, just as with any other purchase, you should buy a house and keep it for as long as possible. Do your homework and then negotiate. And know your alternatives (like renting).

Your house is your home. It is not a speculative investment. Real estate speculation is best reserved for gamblers and the pros.

Your personal residence is not an investment; it is a basic need. Stop confusing the two! Very few misguided ideas have done more to damage our financial stability during the housing bubble than the mistake of thinking about home as something other than shelter. On its own merits, the idea that your home is an investment is quite silly. First, consider the return on your investment. Your home only appreciates at about 3 percent per year, on average (we can all forget about the 10 percent growth of the boom years. We are paid for that with the drop in prices during the bust years). Three percent growth is about the annual rate of inflation. So at best, you can expect that the money you put into your home will be protected from inflation, which means your home never makes any headway as an investment because any value it gains is simply canceled out by the increasing costs of the goods and services in the world around it. Next, consider that, in a typical 30 year mortgage, you are going to pay nearly double the asking price by the time you pay off your mortgage (you do intend to pay off your mortgage, don’t you?). And what about maintenance? During those thirty years, you will likely do some remodeling and pay a lot of money for it. That doesn’t even count the cost of utilities and taxes. If I came up to you and said, ‘I have a stock that will go up an average of 3 percent annually for the next thirty years, over the course of that thirty years you can pay twice its current face value, and every few years or so you will have to put in a few thousand dollars for maintenance and, oh, by the way, if you stop making your payments during those thirty years, I get it back’, would you buy it? I hope not. Your home is not an investment; it is shelter.

Another mistake is viewing your home purchase as an investment rather than a place to live. Unlike professional real estate investors most of our real estate success will boil down to timing and luck. Unlike a traditional portfolio of stocks and bonds, a home is an illiquid and indivisible asset — you can’t slice off a piece of your kitchen and sell it for cash. Owning a home is also an extremely undiversified bet on a single neighborhood in a single geographic region. Homes also offer very little long-term price appreciation after adjusting for inflation over the past 125 years. Not only are the price gains minimal, but you must spend additional capital on maintenance and improvements to prevent your home value from depreciating over time — not exactly something you want to see in an investment”.

Houses are an expensive indulgence, not an investment. That’s OK if and when the time for such an indulgence comes. I’ve owned them myself. But don’t let yourself be blinded by the idea that owning one is necessary, always financially sound and automatically justifies taking on this ‘good debt’.

Most people are eager to own their own home, which is typically a good financial decision, but, remember, you should consider your house as a personal-use asset, not as an investment asset. Aside from being certain that you can afford the mortgage and maintenance costs, you should plan to hold on to a property for at least a decade, since owning a home is a long-term proposition.

Of course there will be those areas in big cities, waterfronts, and popular school districts that are outliers over time if you bought in at the right time and in the right neighborhood. But a house is likely the biggest asset you will ever purchase that requires a significant amount of debt in a single property that’s tied to your local economy, where you also happen to live and work. It can be a huge risk to use only your home to fund your retirement. Plus there’s the fact that you can’t spend your house, so to speak, unless you take equity out of it. I’m not saying that you shouldn’t purchase a home because it doesn’t have an above average return profile. On the contrary, a home can provide a psychic income — you get to choose your own neighborhood, school district, and take pride in home ownership by putting down roots in a place that you control. Think of housing as more of an asset that forces you to build equity over time than an investment that is likely to compound your savings. On average, your primary residence is not likely to be a huge money winner after netting out all costs and the potential risk involved with putting your entire net worth into a single, levered asset.