Real Estate vs. Index Funds: 50 Years of Returns Compared

Real estate and stocks are the two most common wealth-building tools in America. Most people assume real estate is safer and more profitable. The data says otherwise.

The headline numbers

Over the past 50 years (1975-2025), using data from the Federal Housing Finance Agency (FHFA) House Price Index and NYU Stern’s S&P 500 return dataset:

Asset	Nominal Annual Return	Real (Inflation-Adjusted) Return
U.S. residential real estate	~4.5%	~1.5%
S&P 500 (with dividends reinvested)	~10.5%	~7.5%

That gap compounds dramatically. $100,000 invested in 1975:

• Real estate: ~$900,000 today (nominal)
• S&P 500: ~$14,000,000 today (nominal, dividends reinvested)

The stock market returned roughly 15x more than housing over the same period.

Why the gap is wider than it looks

The real estate return above measures price appreciation only. It doesn’t subtract the costs of ownership: mortgage interest, property taxes, insurance, maintenance, and transaction costs. When you subtract those, the net return on real estate drops further.

Meanwhile, the S&P 500 return includes dividends reinvested and assumes a low-cost index fund (expense ratio under 0.1%). After subtracting fund fees, the net return barely changes.

There’s also leverage to consider. Real estate bulls correctly point out that a mortgage lets you control a $500,000 asset with $100,000 down. That 5:1 leverage amplifies returns in rising markets. But leverage cuts both ways:

• If your home appreciates 4%, your equity return is ~20% (great)
• If your home drops 10%, your equity drops 50% (devastating)

The stock market also offers leverage (margin accounts), but most index fund investors don’t use it. The comparison is more fair when you measure total return on invested capital, including all costs.

The Case-Shiller reality check

Robert Shiller, the Nobel Prize-winning economist behind the Case-Shiller Home Price Index, documented that U.S. home prices have been essentially flat in real (inflation-adjusted) terms over the very long run (1890-2000). The dramatic appreciation we’ve seen since 2000 is historically unusual.

His data suggests that homes are primarily a consumption good, not an investment. They provide shelter, not returns. Any wealth built through homeownership comes primarily from the forced savings of mortgage payments, not from appreciation.

What about rental income?

If you buy investment properties and rent them out, the math changes significantly. Rental real estate generates income (cap rates typically 4-8%) on top of appreciation, and the tax benefits (depreciation, expense deductions) are substantial.

But that’s a different asset class than a primary residence. You’re running a business, not just living somewhere. Comparing rental real estate to index funds is a fair debate. Comparing your personal home to index funds is not a close contest.

When real estate wins

Real estate can outperform stocks in specific conditions:

• High-growth local markets (Austin 2010-2021, Miami 2020-2023) can dramatically beat national averages
• Leverage in rising markets amplifies returns for buyers with small down payments
• Forced savings: Many people who wouldn’t otherwise invest build substantial equity through mortgage payments
• Tax-free gains: The primary residence capital gains exclusion ($250K/$500K) is a powerful advantage that stocks don’t offer

When stocks win

• Most 10+ year periods, on average
• When you account for total cost of ownership
• When you have the discipline to actually invest the difference
• In high price-to-rent markets where homes are expensive relative to fundamentals

The honest answer

For most people, a primary residence is not an investment. It’s a lifestyle choice with some wealth-building side effects. The S&P 500, held in a low-cost index fund, has been the superior wealth-building tool over virtually every historical period.

That doesn’t mean you shouldn’t buy a home. It means you shouldn’t buy one expecting it to be your primary wealth engine. If you do buy, make sure you’re also investing in the stock market. If you rent, invest aggressively, because the historical data says that’s where the real returns are.