The Millionaire’s Mortgage

Paying off your house is saving for retirement.

Photo illustration: a stock image of a house with 401(k) in place of normal street lettering.
Photo illustration by Slate. Photos by Thinkstock.

There’s a lot of discussion lately about how to save up $1 million for retirement. The conversation began with a press release from Fidelity, which means it has invariably been framed around investing in stocks and bonds. Put as much money as you can into your 401(k) year in and year out, repeat for several decades, and with a bit of help from the market, you too could find yourself a millionaire.

But there’s another way of doing it, one that takes advantage of a worrying fact about the present: Housing is eating the world.

That’s Alex Tabarrok’s pithy formulation; the slightly less pithy version is that housing values are eating up more and more of the money in America’s (and the world’s) cities.

To put it in less abstract terms: If you go to college you’ll earn more money, even after taking into account the cost of student loans. But in order to earn more money, the chances are you’re going to have to live in a pretty rich city. And if you’re living in a pretty rich city, then you’re going to have to spend a lot on housing. The extra money you spend on housing is going to cut quite deeply into whatever extra money you make by dint of having gone to college—and make it hard to keep making those 401(k) contributions every month.

That trend, of urban house prices rising much faster than suburban or rural prices, is 20 years old now, and shows no sign of abating. Here’s a chart from Zillow:

Image from Zillow Rent Index.

At the beginning of 1996, urban homes were actually cheaper than their suburban counterparts. And then everything changed: From January 1996 to November 2017, suburban houses appreciated by 112 percent, while those in cities went up by 195 percent. That’s a huge difference, and there’s no reason to believe that the trend is going to abate any time soon.

What that means is that making mortgage payments can, in theory, be a way to accumulate wealth almost as effectively as contributing to a retirement fund.

In fact, if you buy an urban house today for $315,000 (the average price) and it appreciates at 8 percent a year for the next 15 years, you will be living in a $1 million house by the time you pay off your 15-year mortgage, and you will own it free and clear. Which is to say: You’ll be a millionaire, for a cost of $63,000 down and $1,928 a month in mortgage payments at an interest rate of 4.5 percent. (Plus you’ll have a place to live not just for 15 years but, if you want it, for the rest of your life.) Total outlay: $410,000. If you itemize your tax return it’s even less, thanks to the mortgage-interest tax deduction.

The 8 percent appreciation rate is aggressive, but not entirely unrealistic: It’s lower than the 8.3 percent appreciation rate from 2011 through 2017, and also lower than the 9 percent appreciation rate from 1996 to 2007. More to the point, because you’re buying a consumption good (shelter), you don’t actually mind very much if it doesn’t rise in value. The mortgage is a hedge against rising housing costs at least as much as it’s an investment in its own right.

Now consider what you would need to do to become a millionaire through your investments. Start with the same $63,000, and rent somewhere cheap—say, $1,200 a month. Take the other $728 a month and put that into the stock market. Compound it all at the same aggressive 8 percent growth rate, and at the end of 15 years you have $437,000—and you still have to pay rent every month for the rest of your life. Also, consider that over the course of 15 years, there are probably going to be plenty of months when you can’t spare $728 to put into the stock market.

Paying into that 401(k) requires an effort of will, even if you have it deducted from your paycheck automatically. But if you’re a homeowner, you’re going to make your mortgage payments if you possibly can, partly because you’re paying for something real that you’ve invested a huge amount of time and money in, and partly because the alternative—losing that house—is so painful.

There are plenty of downsides to homeownership, of course. A house often feels more like a liability than an asset, especially when you need a new boiler or roof. Owning a home makes it harder to move when moving makes sense, whether it’s to a bigger or smaller place or to a different city entirely. And when you’re going through one of those tough broke periods, a substantial mortgage that needs to be paid every month can be a very unpleasant burden. So for all that a mortgage is a very effective forced-savings commitment device, it’s definitely not for everybody, or even for most people. (Most people don’t have $63,000 to put into either a down payment or a retirement fund; the theoretical choice between the two is very much a rich-people problem.)

So what’s my point? Just that when it comes to saving for retirement it’s silly to concentrate on mathematics rather than messy reality. Do stocks have a higher return than houses? Sure, if you actually buy them every month: The return on stocks you never buy is always zero. Paying your mortgage and keeping yourself in the home you own and love is easier and more fulfilling than sending a chunk of your paycheck off to a faceless financial-services company to invest in companies you probably don’t even like.

Yes, you’ll need money when you retire; you’ll also need a place to live. And if you want to live in a city when you’re no longer working, you’re going to be competing for shelter with a bunch of high earners—unless you own your own place.

Pundits who game out ways of getting to $1 million in a 401(k), then, have everything backwards. If you’re the kind of person who can max out your 401(k) every year for 30 or 40 years straight—disciplined, frugal, and apparently immune to misfortune—then, well, congratulations on your great good luck, and I hope you’re at least a little bit embarrassed at how much of a tax break you’re getting compared to people who need government support much more than you do. Just remember that your achievement is not easily replicable. On the other hand, if some financial adviser starts guilt-tripping you because you’re not on the way to $1 million in savings, find another financial adviser.

Homeownership, by contrast, is a much more achievable goal, and one that can allow you to build substantial wealth over the course of your life. Most American households own their homes. If you can see your way clear to paying off your mortgage—and avoid the temptation to refinance—then the prize at the end is substantial, valuable, and pretty realistic. It doesn’t impress like $1 million in a 401(k) impresses. But it gives you a place to live, maybe even in the city you love.