Rent vs. buy: Housing's most misunderstood aspect
Returns can only be compared in conjunction with risk. Homeownership can be used as a tool to derisk an important area of life to create room for additional risk in others.
TLDR Summary
The American Dream has changed. Today, many people believe that renting is objectively better than homeownership because stocks outperform real estate. There are allegedly only subjective emotional reasons to prefer homeownership anyway. I argue that homeownership can be objectively desirable and that this can even be true if we accept the superiority of stock market returns.
We can’t just look at the total return of each asset class and conclude the one with the highest return to objectively be the best. Returns are a function of risk. Risk is volatility. And volatility can wipe you out if it happens at the wrong time.
A proper personal financial strategy therefore doesn’t only look at assets. It has to match them to the individual’s liabilities. What you need and want has to be matched to what you have.
For most people, their future spending on housing is one of the largest liabilities. Owning the home they live in is the most direct form of asset liability matching. It avoids (or at least greatly reduces) the risk of running into a major crisis should their income at some point fail to support their rental payment. That is even the case if there is a mortgage because there are no margin calls on those.
This asset liability matching greatly decreases financial risk which may allow for greater risk taking in other endeavors, whether in investing or career. The decision to rent or buy can therefore not be made or supported in isolation. It requires the full portfolio context.
Renting and investing allegedly beats owning a home
Yes, homeownership is famously a core of the American Dream. But it’s not that black and white anymore for many people who proudly prefer assets with more sex appeal, such as technology stocks or Bitcoin.