Thinking about buying stocks instead of a home as mortgage rates top 7%? The S&P 500 has blown away the housing market over the past decade

As mortgage rates climb past 7%, many are reconsidering whether investing in stocks is a better financial move than buying a home. The S&P 500 has outperformed the housing market over the past decade, according to recent analysis. The surge in mortgage rates is expected to exacerbate this disparity, as the housing market has been relatively stagnant since the COVID boom subsided in 2022.

The Federal Reserve is tightening policy once again, pushing the average 30-year fixed mortgage rate above 7%. Meanwhile, the AI boom has propelled stocks, with the S&P 500 experiencing double-digit annual gains since the late 1990s. Younger Americans, who have been priced out of the housing market, are opting to rent and invest in stocks instead of saving for a down payment on a home.

Over the past decade, the Case-Shiller Index of home prices rose by 87%, while the S&P 500 surged 235%, not including dividends. Economists Ray Fisman and Michael Luca argue that the decision to buy vs. rent is more complex than commonly perceived. They write that homeownership bundles two crucial decisions: where to live and how to invest a significant portion of one's savings.

While a home provides a place to reside and an investment return, its tax benefits may not offset the risks. For instance, a 20% down payment on a house that appreciates by 10% yields a 50% return on the initial equity, but a price decline magnifies losses. Financial advisers caution against using excessive leverage when purchasing a home, as home prices are illiquid and undiversified assets.

The housing market is currently in a buyer's position, with sellers offering concessions such as mortgage rate buy-downs, appliance gifts, and cash rebates. Home prices have even been dropping in some areas, thanks to these incentives. This could make homes more affordable for buyers, but the decision of where to live should not be conflated with the choice of where to invest money.