Build Wealth - Buy home or stocks (first)

 

(Gloria Steinem)

Here’s a typical conversation I have with a (female) client or prospect…

Me: So, tell me.  What is your key financial goal(s)?

Potential (Female) Client:  It’s always been a dream of mine to buy a home.  Nothing big or flashy.  Just enough space to call my own, my personal sanctuary. Also, I want to establish a financial foundation to build wealth (quickly).  Stocks go up and down, and don’t feel stable or real.  But, a home is stable and tangible.  If the economy tanks, I can still live in my house, which will continue to appreciate over time.

Me (raining on her parade):  I hear you.  I hear this a lot.  Most of women I speak with assume that a home is a great financial investment.  Unfortunately, based on my professional experience and the numbers, this assumption is wrong.  A home is a great EMOTIONAL INVESTMENT, but it’s a FINANCIAL EXPENSE.  In confusing apples for oranges, many women prioritize buying an asset (home) that ironically keeps them financially behind for years, if not, for life.

(Potential client looks doubtfully at me =)

Returns over time – Stocks vs home

Since the majority of my clients are their 20s-40s (age), building wealth is their primary financial focus.  And, most women assume the best place to start is by buying a home. Additionally, since COVID (2020), home prices have increased by ~50%.  (See line graph below.)  

SOURCE: “Map Shows Where Home Prices Have Soared the Most And Least Since COVID,” Newsweek, July 2026.

As is, some women clients feel they’ve missed the boat, while others feel they should get on the bandwagon ASAP.  And, they look to me for guidance: “When is a good time to buy?  How much home can I afford?  What financial terms are best for me – 15 yrs, 30 yrs, ARM (adjustable)?”  Interestingly, few women ask me how home ownership fits into their overall financial goals, if at all.  

As a financial planner, my typical “response” to clients’ priorities and goals is to look at their situation holistically, provide them greater context, and the pros and cons to various options.  This way, they can make more informed decision(s).  For example, the bar graph (below) shows the annualized return of different assets for the past 20 years, ending 2021.  Notice the annualized return for S&P 500 (stocks of the biggest US companies) is 9.5% vs 4.2% for a home.   

Source: JP Morgan Wealth Management, 2022.

How can this be?  Reason being, a home is an emotional asset, but it’s a financial expense:

·      Typical mortgage = hundreds of thousands of dollars in debt at ~6% interest (at least)

·      Property tax = 1% of home value annually

·       Maintenance cost = 1% of home value annually (average)

·      Insurance, which continues to rise due to climate change

·       Transaction costs for selling a home is about 5-6% of sale’s price

·       Sales tax (of course)  

·       Capital gains tax if sale proceeds ≥ $250K (individual) and ≥ $500K (couple)

(Side note: To those who argue that a home appreciates more quickly on the coasts, I remind you that the purchase price is also higher and, therefore, the cost of ownership. These factors erode overall net return and, thus, bring them down closer to national average 4.2%…Sorry to pop your bubble. Pun intended.)

Moreover, a home is illiquid.  You typically can’t sell a piece of it to address incidental cash needs (e.g., job loss, unexpected medical bill(s), new roof, new water heater, foundation issue).  It’s usually an all or nothing ownership decision.    

While a home is expensive to buy, own, maintain and then eventually sell, stocks are cheap to buy, own, maintain and sell, for example:  

·      Stock purchase can be made with a small amount of money, depending on the stock, it could be as low as a few dollars.   

·      Capital gains tax is only recognized when you sell stocks for a gain.  If you hold asset more than a year, then taxes will be at lower capital gains rate
(0-20%) vs higher ordinary income (tax) rate (0-37%). 

·       “Maintenance” cost for stocks are negligible and typically very low (0.05%) for US stock index fund – a basket of different company stocks.

·       No insurance cost.

·       Transaction costs are very low: $50/transaction (brokerage rep executed); $0 (self-executed).

·       No sales tax aside from potential capital gains tax.

Additionally, unlike a home, stocks are very liquid (easy to sell) and, thus, offer a good deal of flexibility.  Need some cash to address an emergency?  No

problem.  Sell some stocks or stock index funds. 

Stocks – Build wealth more quickly and safely over time

As shown the bar graph (above), the difference in annualized return between S&P 500 stocks (9.5%) vs home (4.2%) is 5.3%.  Compounded over 40 years, that difference results in the line graph below.  (NOTE: S&P 500 blue line assumes you reinvest dividends while green line assumes you don’t.)  The S&P 500 (dividends reinvested) returned 4,632% more than a home!!!