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The tax free gains that that money would have earned you for the rest of your life is gone.

Not really. The money will just be a new retirement vehicle called "home equity." Granted, long-term returns on stock are better than real estate, but leverage is much, much cheaper for U.S. primary resident purchase than it is for stocks. If the buyer isn't stretching his/her limits and that SEP/IRA money goes toward a 20% down payment on a home that he/she plans to inhabit for many years, then the money will usually be put to good use (i.e. it wouldn't have done any better in a stock-based retirement account).

I'm not sure I agree. Most people forget to include the very significant annual carrying charge when they talk about real estate returns -- namely, real estate taxes. If you were to buy a smaller home (or not buy at all) and keep the money in a retirement fund, you might end up quite a bit ahead. Add in the net after-tax, out-of-pocket cost for the mortgage and I'm confident the retirement fund is the better choice.

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