Homeownership, Renting and the American Dream

We have recently developed a calculator designed to estimate the opportunity cost of taking out a mortgage. This tool enables users to explore scenarios for interest rates, home values and potential returns from alternative investments. We developed the mechanics of this calculator for research purposes and after enhancing its interface design with the Base44 AI tool, we decided to make it publicly available. While working on our findings, which involved testing properties using representative samples from across the U.S., we found that, under many scenarios, particularly in the Western part of the country, hypothetical individuals who rent and invest their savings could achieve significantly greater net worth than homeowners.

This raises an important discussion about the nature of the “American dream,” which has often been associated with homeownership and its implications for housing policy. The emphasis on buying a home has likely contributed to a widespread misconception that owning a home is the “best” investment compared to renting. Certainly, homeownership can be advantageous, particularly when interest rates are low, home prices are reasonable and stock market returns are poor to modest. Emotional and behavioral factors also play a role. For some individuals, a mortgage acts as a motivating force, encouraging people who might not otherwise invest to commit to building wealth through homeownership. However, for others, their home represents their largest investment, mainly because it is the only investment they ever make and the belief that renting is “throwing money away” often does not align with the mathematical realities of financial investment.

These expectations have significant policy reverberations. Although houses are part of a complex network of financial instruments, they are not genuinely capital goods; rather, they possess capital-like characteristics. Norbert Michel and Jerome Famularo at the Cato Institute point out that federal policy has focused on increasing homeownership for nearly a century. However, “The long-term, wealth-building effect of homeownership is often less than that of renting and investing in the diversified market.” 

Considering these dynamics, it becomes clear that homeownership and investment outlooks have a downstream influence on the broader housing market. Research into the so-called “Homevoter Hypothesis” suggests that the desire to protect home values, particularly when individuals’ entire net worth is tied to a single property, contributes to NIMBY (“Not in my backyard”) attitudes that hinder housing development and perpetuate high housing costs. This “supply-skepticism” is often reinforced by the belief that new development only benefits developers while diluting the exclusivity of the neighborhood.

A more open and honest conversation about the true effectiveness of homeownership as a wealth-building tool compared to alternative avenues may ease some of the resistance to expanding housing options. The emphasis on the value of a single asset class, rather than a holistic view of wealth, creates a political environment in which maintaining high housing costs is treated as a necessary defense of the American dream. This worldview has led to an overly narrow interpretation of financial success, even though wealth can be built through many different paths.