According to long-term data from the Federal Reserve Bank of San Francisco, residential real estate has historically delivered average real returns of around 7%—comparable to equities over the same period. But that’s a global average over 145 years, not a U.S.-only figure. U.S. housing returns, once you adjust for inflation, tend to land lower—especially after taxes, maintenance, and transaction costs. Still, many Americans continue to believe their home is their best investment.

The belief that “real estate always builds wealth” can miss some important nuance. This article compares homeownership returns to stocks, REITs, and inflation, and explains what buyers are really getting: appreciation, leverage, and hidden trade-offs.

Key Takeaways

• Residential real estate appreciation has lagged equities over the long term, especially after inflation.
• Home equity builds slowly, especially in early mortgage years, when payments are interest-heavy.
• Leverage can amplify returns—or losses—but introduces risk and liquidity constraints.
• REITs offer real estate exposure with lower entry costs, diversification, and passive income.
• Homes often act more like forced savings tools than high-growth investments.

How Real Estate Really Performs Over Time

Between 1950 and 2023, U.S. housing prices, as measured by the inflation-adjusted Case-Shiller Home Price Index, increased from approximately 152.95 to 253.63. This represents a cumulative real growth of about 65.8% over 73 years, translating to an average annual real return of approximately 0.7%. Meanwhile, U.S. stocks (S&P 500) returned around 7% real terms, including dividends.

That gap compounds dramatically over time. A $100,000 investment growing at 3.5% becomes ~$280,000 after 30 years. At 7%, it becomes ~$760,000.

Of course, homes provide utility—shelter, stability, control. But those benefits don’t translate into investment outperformance. In fact, when factoring:

• Property taxes
• Maintenance and repairs
• Transaction costs (can often 6–10% when selling)
• Illiquidity

…the net return shrinks further.

So what? Many homeowners assume price growth equals investment success, but long-term data tells a different story—especially once costs are included.

Leverage Makes the Math Look Better—But Adds Risk

Real estate’s standout feature is leverage. A person can buy a $500,000 asset with $100,000 down, meaning even modest price growth is magnified in equity terms.

• Hypothetical: A home grows 3% in value over one year—from $500,000 to $515,000. That’s a 3% property return, but a 15% gain on the $100,000 down payment (ignoring costs and taxes).

However, this works both ways. A 10% drop wipes out $50,000 in market value—50% of the equity. The mortgage still needs to be paid. The owner may not be able to sell without taking a loss.

Unlike margin in a brokerage account, there’s no stop-loss in real estate. And selling takes time.

Homeownership vs. REITs

REITs (real estate investment trusts) offer exposure to real estate—without buying physical property. These publicly traded vehicles typically invest in office buildings, apartments, or industrial properties. Advantages include:

• Liquidity (REITs trade like stocks)
• Diversification (across property types and geographies)
• Dividends (REITs must pay out 90% of income)
• No maintenance responsibilities

From 1972 to 2024, U.S. equity REITs returned an average of ~11% annually (NAREIT, 2024). That’s competitive with stocks—and ahead of owner-occupied housing.

Still, REITs carry market risk and can be volatile. Many investors use them to complement, not replace, physical property exposure.

The Behavioral Case for Owning—Not Investing

Why do so many people think of their house as an investment?

Because it feels like one. It’s big, visible, and (usually) appreciates over time. But functionally, a primary residence is often closer to consumption than investment. Unlike rental property, it:

• Doesn’t generate cash flow
• Requires personal maintenance
• Locks up capital
• Can’t be easily sold or rebalanced

Behavioral trap: People assume appreciation equals return—but forget to subtract expenses, opportunity cost, or transaction drag.

That said, there’s a form of return that’s harder to quantify: stability. Owning a home can foster long-term relationships, deeper community ties, and a sense of permanence that renters—who often face involuntary moves—may not experience. These non-financial benefits don’t show up in annualized return charts, but they matter. They shape how families grow, how support systems form, and how a sense of security builds over time.

Some investors may be better served by treating their home as a lifestyle asset—and using portfolios to build wealth. But for many, the home’s greatest value isn’t leverage or appreciation—it’s the foundation it provides.

Inflation Hedge or Forced Piggy Bank?

Real estate can often be pitched as an “inflation hedge.” That’s partly true—home values tend to rise with inflation over time, and fixed-rate mortgages benefit from devalued future dollars.

But homes don’t produce income. And during periods of inflation-driven rate hikes (like 2022–2023), housing markets can stall or decline due to affordability constraints.

For many, a home functions as a forced savings vehicle. Mortgage payments build equity slowly, which can be helpful for people who struggle to save otherwise. But that discipline has a cost: lost liquidity, missed portfolio growth, and financial inflexibility.

Here’s the bottom line: A home can support wealth—but rarely drives it. Treating it as an investment often overstates its return and understates its cost. Investors who separate their living decisions from their portfolio strategy tend to make clearer, more adaptable choices.