[nradov]

Home ownership isn't a good financial option for everyone, but for most consumers who aren't accredited investors it's the only way to make highly leveraged trades. You can't buy an index fund with 20:1 leverage. Of course this occasionally blows up, but even then the downside is limited.

Even if ownership doesn't make sense from a financial standpoint it's still somewhat essential for parents of school age children. Renters can be forced to move on short notice if the landlord declines to renew the lease, like if they're planning to sell or redevelop the property. This instability has a cost that goes beyond financial concerns.

[spacemark]

People always talk about how buying a home is the only way for the common person to obtain leverage. Please excuse my ignorance, but how does the common person use that leverage, exactly?

[NoLinkToMe]

Leverage in finance is the concept of buying an asset with money that's not yours (i.e. a loan).

So suppose you have $100, and you believe a stock will increase by 10% in value, then borrowing $900 and buying $1000 of the stock, will leave you with $1100 if your prediction is true. When you pay off the loan, you'll be left with $200, and you will have doubled your money.

The loan thereby acts as a leverage multiplying the 10% return on investment to in this case a 100% return on investment.

Now imagine that instead of having $100, you have $50k, and instead of borrowing $900, you borrow $450k, and instead of buying stock, you buy a home with the 50k deposit and 450k mortgage. The same applies, the home appreciates 10% to 550k, but your equity increases from $50k to $100k. Again, the mortgage loan acts as a lever.

The difference is that most consumers do not have large and cheap capital available to them, say to borrow $450k to invest in the stock market. But most people do have such opportunities to invest in the real estate market with a mortgage.

Anyway, wether it's a good investment really depends on many factors. The NYT buy or rent calculator is still one of the best sources to get an intuition on what is best for your circumstance. https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...

[baobabKoodaa]

Example:

House costs $100k

You buy house with $20k savings and $80k debt

In this example that $80k of debt is called "leverage".

Is this what you mean with your question or did you mean to ask something else?

[spacemark]

Right, my question is more about how the average person can actually use that leverage. So you've got $80k in leverage, it grows (presumably), but how do you actually use it?

You have to sell the house, right? So you can only cash in on that leverage when you reverse mortgage or otherwise downsize, right?

[baobabKoodaa]

Correct. Just like any leveraged investment, you realize the gains (or losses) after you sell.

(And yes you are also correct it's possible to realize the gains without selling by taking a reverse mortgage.)

[elevatedastalt]

Yes, but thanks to leverage you have effectively created higher returns for your retirement portfolio than you would have been able to without the leverage.

[spacemark]

Higher returns than what though? It sure sounds like the only financial advantage to owning a home vs other investments is the leverage. Yet the S&P will return far more even considering the 80% leverage in most cases.

[elevatedastalt]

> Yet the S&P will return far more even considering the 80% leverage in most cases.

Could you explain your line of thought (or back of the envelope math)?

[elevatedastalt]

Not only that, it has better terms than a leveraged loan, since you can't get margin called! As long as you are making your mortgage payments you can't be foreclosed even if the value of the underlying property has plummeted.