The Stock Market Provides a Better Return than Homeownership. But That’s Not the Whole Story

Last week, The Wall Street Journal added to the eternal debate about whether it’s better to invest in the stock market or a home. The study, conducted by Derek Horstmeyer, a professor of finance at George Mason University and his team, unsurprisingly concluded that the S&P 500 delivered a better return on investment.

“We considered a hypothetical home buyer in 1985 who was planning to purchase a $100,000 house but had some extra money to spend and was debating whether to buy a more expensive home or put it in the S&P 500,” wrote Horstmeyer.

“We assumed that the individual put 20% down and financed the rest of the home purchase with a variable-rate mortgage 2 percentage points above the Treasury bill rate, updated monthly. We then calculated the returns this home buyer would have received after accounting for federal, state and local taxes in both options.”

The study’s window closed at the end of 2025, and applicable state and federal taxes were deducted from the proceeds for each investment.

A Fair Comparison

That seems to us a fairer comparison than many similar studies, which often just compare the returns on the same lump sum rather than acknowledging that the investor needs to live somewhere and will have to pay rent or buy a home.

And the fictional 1985 house bought for $100,000 was a good one. The median U.S. home sale price at the end of that year was $86,800, according to Macrotrends, so the property could credibly meet its owners’ needs for 40 years.

With a Home, Returns Depend on Location

However, all that meant the gap between stocks and home prices was smaller than many might think. The S&P 500 investor got a 7.57% average annual return over the 40 years.

Within metro areas, annual homeownership returns over the same period varied from 6.22% in Seattle (the best) to 3.88% in St. Louis (the worst).

Naturally, there were also variations between states. The five best performing were:

1. Idaho (5.90%)
2. Arizona (5.89%)
3. Oregon (5.79%)
4. South Dakota (5.50%)
5. Utah (5.33%)

And the five worst performing states were:

1. Illinois (2.36%)
2. Kansas (3.13%)
3. Iowa (3.27%)
4. Nebraska (3.31%)
5. Ohio (3.69%)

So, investing in stocks is more profitable than buying a home everywhere — and three times as profitable in a slow housing market, such as those five worst-performing ones.

However, that’s not the only financial consideration. As we saw last week, volatility in stock markets is much higher than in housing markets.

True, housing experiences downturns, too. But Horstmeyer found annual volatility over his 40-year period much higher in stock markets than housing markets: 16.5% p.a. for the S&P 500, compared with 9% for housing.

So, stock investors need to live with sharp ups and downs in their net wealth.

Horstmeyer acknowledged that his study did not examine returns on investment properties, such as buy-to-rent-out units and vacation homes with incomes from Airbnb or more traditional sources.

Homeownership Advantages over Stock Investing

Few of us have the advantages the study’s fictional investor had back in 1985. If they are still alive today, they had enough to buy an above-average home with a 20% down payment and still had funds left over to invest in stocks — all while probably still in their 30s or 40s.

Most of us today get mortgages with smaller down payments (as low as 3% for a Fannie Mae- or Freddie Mac-branded one), and even that is a struggle to save for. VA and USDA loans come with 0% down payment requirements. Once we’ve bought, we face another struggle to keep up with mortgage payments.

Finding spare cash to invest in stocks is next to impossible for many homeowners, especially in the years following their first purchase. Indeed, many Americans who don’t want to buy a home lack the will or the ability to buy stocks.

Homeownership focuses the mind on making that mortgage payment, enforcing a level of financial self-discipline that the discretionary purchase of stocks can’t provide. In other words, being a homeowner is the only way many Americans can build net worth.

Then there are other advantages to homeownership:

1. If one borrows with a 3% down payment, and one’s home appreciates 5% one year, one’s return on one’s highly leveraged initial investment is huge. Conversely, however, if home prices fall, the loss is significant.
2. With a fixed-rate mortgage, one can be sure one’s payment will remain the same throughout the term of the mortgage. Meanwhile, rents tend to rise, often significantly.
3. A home can be a source of pride and prestige. Owning stocks isn't as visible.
4. One has control when one owns one’s home. Changes, additions, remodeling — they are the choices of the homeowner, not the landlord.
5. Assuming they keep up with mortgage payments, a homeowner can stay in their home for as long as they wish. There’s no landlord to send them packing.
6. That ultimate security of tenure allows a homeowner to grow roots in their community, something that can add to psychological well-being.
7. Although these are taken into account in Horstmeyer’s study, homeowners are typically eligible for several tax breaks.

Horstmeyer’s conclusion seems fair to us: “Ultimately, the value of a home goes beyond the bottom-line price appreciation in that you have a place to live and make memories. And sometimes there isn’t much choice, say, when you have to relocate for work or buy a bigger home for a growing family. But the results highlight that home-price returns in even the hottest metro areas across the U.S. couldn’t match the stock market over the long run.”

In other words, stocks deliver higher returns than homeownership. But the intangibles that come with owning one’s own home can more than make up for that.