But there is a fatal error that Ramit makes by his graph and conclusion that the S&P outperforms the housing market: his failure to consider leveraged returns.

 

Returns on housing should be calculated using a 20% down payment. If you don't pay cash (which most people don't), the investing “performance” of a house is leveraged - you get 100% of the gains with only 20% of the investment.

 

So I asked AI to take the above graph and duplicate it using a 20% down payment. 

 

The red line is housing since 1970 with 20% down. The middle line is the S&P. And the house wins again.

 

Now, I agree with Sethi's broader point. Houses cost money to maintain. They don't generate income unless you sell or rent them. And my graph doesn't factor in all those additional costs. My AI actually added, “Not included in housing returns: Mortgage interest payments, property taxes, insurance, maintenance costs, or potential rental income.” Correct.

 

 

I've watched this play out in real life. I don't know a single renter who actually takes their "savings" from not buying and systematically invests it in index funds.

 

But I personally know, after selling real estate for 25 years, at least 500 real estate millionaires who got there, not through sophisticated analysis, but through one simple mechanism: their mortgage payment forced them to build equity every month.

 

The problem with the rent-and-invest strategy isn't the math, it's the humans doing the math.

 

Homeownership is forced savings with leverage. It's an automatic wealth-building system that doesn't require discipline, just the ability to make your monthly payment to pay for the roof over your head.

 

It's investors who make money, not the investments. And most people are terrible investors—except when they don't realize they're investing at all.