Houses vs. Stocks: Which is Better?

By Ezra Klein.

One point some of you made in comments is that when you pay a bank for your home, you're paying to "own' something, not just live in it. In theory, this is what makes home ownership a better investment than renting. You're purchasing something you can one day sell. But money is fungible, and cash spent buying a home could also be spent investing in stocks. And stocks are a considerably more useful investment. One of the problems with looking to a home as your guarantor of economic security is that at the times you're most likely to need to sell it -- a recession, say -- it's going to be worth fairly little, and it'll be very hard to sell quickly. You could, of course, drop the price, but then you'll be taking a huge hit. This is true, to some extent, with stocks, which also tend to be worth less when they're needed most.

But with stocks, you can limit the damage. A home has to be sold all at once. If the investment was $300,000, you're getting a bad return on $300,000. Stocks can be sold in essentially whatever quantity you choose. If you invested $300,000, and for some reason need $50,000 during a recession, you can sell exactly that quantity, and limit the bad return to a sixth of the original investment. That's one more reason stocks turn out to be quite a bit better for investment purposes than a home. Which is not to say that there's no reason to buy a home. But insofar as folks are being pushed t stretch beyond their means because it's a wise decision from a money management perspective, they'd often be better served by continuing to rent and pushing the overflow into stocks. Homes are a lot of things, but when they're your primary residence, it rather complicates their role as protector of liquidity. A lot of these points, incidentally, are made well in this article from eFinance.