A Nobel-Prize winning economist and Yale professor explains why buying a big house is a waste of money

Business Insider | Jun 25, 2019, 12.28AM IST

big house with pool

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Shiller and other experts say buying a home isn't a great investment when you run the numbers.

  • Big houses are a big waste of money, Nobel Prize-winning economist and Yale University professor Robert Shiller told the Wall Street Journal.
  • The ubiquity of technology has replaced our need for big, sprawling houses, Shiller said. Plus, buying a home in general isn't a great investment.
  • Despite this, many people view a large home as a sign of success.
  • Regardless of income, living on less than you can afford is one of the best ways to increase your chances of building long-term wealth.
  • Visit Business Insider's homepage for more stories.

A sprawling, multi-bedroom home may be your idea of peak success, but buying one is a waste of money, according to Nobel Prize-winning economist and Yale University professor Robert Shiller. 

When the Wall Street Journal recently asked a handful of financial experts to pinpoint how Americans are most wasteful with their money, Shiller revealed his distaste for oversized real estate.

"Big houses are a waste. People are still in a mode of thinking about houses that is kind of 19th century. As we modernize, we don't need all this space," Shiller told the Journal's Chris Kornelis.

The economist, who helped create the S&P CoreLogic Case-Shiller National Home Price Index for tracking home values in the United States, said technology has permeated every aspect of our lives, replacing any prior need for extra space in our homes.

"For example, we don't need elaborate kitchens, because we have all kinds of delivery services for food. And maybe you don't need a workshop in your basement, either. You used to have a filing cabinet for your tax information, but now it's all electronic, so you don't need that, either. And bookshelves, for people who read a lot. We have electronic books now, so we don't need bookshelves anymore," Shiller said.

According to previous reporting by the Journal, it appears many millennials are on the same page as Shiller. The generation that now represents the largest cohort of homebuyers is reportedly shunning the ornate, ostentatious homes of the baby boomer generation and opting for minimalist, often more affordable digs.

Plus, Shiller and other experts say buying a home isn't a great investment when you run the numbers - and that's especially true for a lavish home. Generally, the growth in the housing market doesn't make up for years of depreciation and maintenance costs. Those who buy a home with the understanding that it's not going to produce a huge return are often better off, experts say.

Seattle-based certified financial planner Ellen Weber also shares Shiller's opinion. "This whole notion that every single person in the house needs their own bathroom is somewhat ludicrous. And yet most homes now are built with that kind of space, even though families are shrinking," she told the Journal. "More and more of our stuff is stored electronically; we should need less storage for it. There's also a tendency to buy houses with big yards that most people do not use but end up spending lots of money paying someone else to mow and maintain."

Still, it's clear why McMansions became all the rage in the early 2000s. "Having a big house is a symbol of success, and people want to look successful," Shiller said. But controlling your housing costs has a huge impact on future wealth, regardless of income.

"The key to wealth building is to live in a home that one can easily afford," said Sarah Stanley Fallaw, the director of research for the Affluent Market Institute, in her book " The Next Millionaire Next Door: Enduring Strategies for Building Wealth." Stanley Fallaw studied 600 millionaires and found that most of the them had never purchased a home that cost more than triple the amount of their annual income, Business Insider's Hillary Hoffower reported.

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