Earlier this year, the White House, aiming to boost homeownership, proposed allowing workers to use retirement accounts for first home down payments by waiving the current 10 percent early withdrawal penalty. President Trump vetoed the plan because “401(k)s are doing so well.” This may create more favorable outcomes than a simple comparison of home prices and stock market performance might suggest. We model these potential long-term outcomes and find that self-funding a down payment with retirement funds could be a financial boon to many first-time homebuyers.

Why This Matters

Based on financial returns, our empirical analysis confirms that funding a down payment with one’s 401(k) proceeds can be a winning proposition for millions of renters aspiring to buy their first home, especially if they remain active observers of market conditions and interest rate moves throughout their homeownership journey. 

Congress could easily implement a 401(k)-for-down-payment housing program by removing the current 10 percent penalty for early withdrawal to fund a down payment on a first home and (2) deferring income taxes that currently apply to early withdrawals until the 401(k) participant reaches the age for required minimum distributions.

What We Found

To determine whether these incentives make financial sense for aspiring homeowners, we compare returns on owning a home with average annual stock market returns measured by the S&P 500 Index from 1987 to 2025. We evaluate national homeownership returns on an all-cash basis and with two levels of leverage (20 percent down and 3.5 percent down) and for more active and passive refinancers, as well as returns in Detroit and San Francisco, markets that have been stereotyped as weak and strong housing markets, respectively.

Borrowers with low down payments (e.g., 3.5 percent) who refinance whenever rates drop 1 percentage point achieve housing returns comparable with S&P 500 returns (table 1). Borrowers who wait until rates fall 2 percentage points earn slightly less than stock market returns. Homebuyers putting 20 percent down for conventional financing typically see returns about 50 basis points below the S&P 500.

Homeownership returns depend more on whether borrowers cash out equity when refinancing than on the size of rate drops needed to trigger their action. Buyers putting down either amount (i.e., 3.5 percent or 20 percent) who take cash out earn substantially higher returns than those who do not.

On an unlevered basis over the long term, Detroit homeowners (who are a proxy for homeowners in slow-growth, weak housing markets) enjoyed long-term total returns (9.2 percent) that slightly exceeded the national homeownership experience. The reason for this counterintuitive result is that Detroit’s generally flat home price trajectory results in a rent-to-home-price ratio close to the nationwide ratio, thereby raising the financial benefits of homeownership over renting. The average gross rent-to-price ratio in Detroit was 9.5 percent from 1987 to 2025, higher than the national average of 8.2 percent.

For a similar reason, San Francisco’s financial performance (as a proxy for high-growth, high-cost housing markets) has underperformed the rest of the country, with unlevered long-term returns of just 7.7 percent from 1987 to 2025, significantly below S&P 500 returns. This is primarily because of the Bay Area’s very low average rent-to-home-price ratio of just 3.6 percent, which reflects the relative financial bargain of renting versus owning in San Francisco.