0:00:00.451,0:00:03.451 ♪ [music] ♪ 0:00:11.150,0:00:15.380 - [Tyler] So Alex, we're economists. Often[br]people ask me, well what is it that we 0:00:15.380,0:00:19.440 know about investment and investment[br]advice anyway? Now, we've already talked 0:00:19.440,0:00:23.130 about equities, but as economists do we[br]have anything else to tell people? 0:00:23.129,0:00:26.839 - [Alex] Let's talk a little bit about[br]housing, because housing is one of these 0:00:26.839,0:00:29.699 areas where there's a lot of myths[br]around it. People in America, 0:00:29.699,0:00:34.839 it's part of the American Dream. And one[br]thing I think people don't realize is that 0:00:34.840,0:00:39.170 over the long run, house prices are[br]certainly not guaranteed to go up. 0:00:39.170,0:00:43.100 I mean we saw in the financial crisis[br]that house prices came way down. 0:00:43.100,0:00:46.579 But there's still this kind of idea that[br]people have in their heads that they're 0:00:46.579,0:00:51.170 not making any more land, so in the[br]long run house prices have to go up. 0:00:51.170,0:00:54.850 And we know from our understanding of[br]assets that you should not expect your 0:00:54.850,0:00:57.450 house to be a great financial investment. 0:00:57.450,0:01:02.400 - [Tyler] But isn't there a tax reason to buy a[br]home? So if I borrow money for a mortgage, 0:01:02.399,0:01:07.489 and I'm paying income tax and itemizing my[br]deductions, I can write off a lot of that 0:01:07.489,0:01:11.159 mortgage interest and get some of the[br]money back. And that means it could be 0:01:11.159,0:01:14.879 cheaper or more advantageous to[br]buy the home because of taxes. 0:01:14.879,0:01:19.729 - [Alex] But don't forget, a lot of that tax[br]advantage is going to be captured not by 0:01:19.730,0:01:24.689 the buyer, but by the seller. What the tax[br]advantage means is it pushes up the prices 0:01:24.689,0:01:29.789 of homes. It's already built into a[br]higher price, so you, as the buyer, 0:01:29.790,0:01:32.800 don't always get that gain.[br]Often it's the seller. 0:01:32.799,0:01:36.399 - [Tyler] Well, but think of this in[br]terms of elasticity. Say I live in an area, 0:01:36.400,0:01:41.630 like many parts of Texas or Florida, where[br]I get this tax break that increases the 0:01:41.629,0:01:46.140 demand for homes, yes. But then suppliers[br]build more homes and they drive the price 0:01:46.140,0:01:49.849 back down again. And it seems that[br]in a lot of states actually, 0:01:49.849,0:01:53.369 the buyer should be reaping a lot[br]of that tax break. Yes, No? 0:01:53.370,0:01:57.160 - [Alex] If only there were more places[br]in the United States like that, 0:01:57.159,0:02:00.849 I would tend to agree. But one of the big[br]problems we have in the United States 0:02:00.849,0:02:05.109 today is that the demand for housing goes[br]up and you're in some place like San 0:02:05.109,0:02:10.240 Francisco, or New York, or Boston where[br]it's impossible to get permits to build 0:02:10.240,0:02:14.890 more housing. And when the demand goes up,[br]all that means is the price of the house 0:02:14.889,0:02:19.139 goes up. So all of those gains,[br]whether it's from the tax system, 0:02:19.139,0:02:24.079 or whether it's from people wanting to[br]move to San Francisco, all of those gains 0:02:24.080,0:02:28.390 go to the land owners. And that's actually[br]a big problem we have in the United States today. 0:02:28.389,0:02:32.919 - [Tyler] But I do see a stability reason[br]to own a home. Say you're 37 years old, 0:02:32.919,0:02:36.989 you have 2 kids in school, you want them[br]to go to a good high school district. 0:02:36.990,0:02:40.270 You don't want to be told, "You're going[br]to have to move." You want to arrange your 0:02:40.270,0:02:44.110 backyard the way you see fit. And you[br]don't want to have to renegotiate a rent 0:02:44.110,0:02:48.420 contract. All of those factors[br]militate in favor of buying a home. 0:02:48.419,0:02:52.159 - [Alex] So I think you're right for those[br]people. But one thing you've got to keep 0:02:52.159,0:02:56.490 in mind, is that on average, houses are[br]not going to be a great financial 0:02:56.490,0:03:02.550 investment. So you have to be exactly one[br]of those people who wants extra stability, 0:03:02.550,0:03:06.410 more stability than the average person.[br]That's when you're going to gain from 0:03:06.409,0:03:11.439 buying a house. And, keep in mind, that[br]when you buy a house and that heating 0:03:11.439,0:03:14.629 system collapses and you've got to[br]repair that, that's a big problem. 0:03:14.629,0:03:17.719 When you're hit by a lightning strike[br]and you've got to repair the roof, 0:03:17.719,0:03:22.889 that's a big expense as well. So when[br]people say, "I'm only worried about the 0:03:22.889,0:03:26.929 rent going up." Well that's fine.[br]They may be worried about that, 0:03:26.930,0:03:30.830 but don't forget, you've got to be worried[br]about replacing the roof every 20 years, as well. 0:03:30.830,0:03:34.560 - [Tyler] So it's really a marginal question,[br]you're saying. Like at the margin, 0:03:34.560,0:03:38.860 do you need the tax break more than[br]the typical buyer? At the margin, 0:03:38.860,0:03:42.730 do you value the good high school district[br]more than the typical buyer? 0:03:42.729,0:03:46.629 And at the margin, are you better at[br]fixing the broken roof or hiring someone 0:03:46.629,0:03:50.560 to do it than the average buyer? And those[br]things may or may not apply to you, 0:03:50.560,0:03:52.409 but that's the right way[br]to think about it? 0:03:52.409,0:03:56.389 - [Alex] Exactly right, so if you want that[br]tax advantage, you've got to be earning more 0:03:56.389,0:04:00.459 income than average. You've got to[br]be itemizing your deductions. 0:04:00.460,0:04:04.290 If you're not one of those people in the[br]upper middle class, you're not going to 0:04:04.289,0:04:08.590 get that tax advantage. If you've got one[br]kid, maybe the school is not so important. 0:04:08.590,0:04:11.830 Maybe you have to have two before you[br]really get that advantage from the 0:04:11.830,0:04:15.090 schooling. So yeah, you've got to be[br]thinking about how you're different from 0:04:15.090,0:04:19.230 the average. If you really want to buy a[br]home, you've got to love buying a home. 0:04:19.230,0:04:24.450 - [Tyler] I think of people as needing to save[br]more typically. That we're programmed to 0:04:24.449,0:04:28.620 think about the here and now, we're a bit[br]impatient. Perhaps we haven't evolved to 0:04:28.620,0:04:32.500 think well enough about the more[br]distant future. If you buy a home, 0:04:32.500,0:04:36.629 pay off your mortgage at the end of 30,[br]or one hopes 15 years, 0:04:36.629,0:04:40.079 you own something. In the meantime, you're[br]saving. And you get into a routine that 0:04:40.079,0:04:44.069 doesn't even feel like saving. It's more[br]savings than if you're writing a rent 0:04:44.069,0:04:48.810 check every month. So maybe it's our own[br]imperfections. We need to lock ourselves 0:04:48.810,0:04:52.959 into a higher savings regime, and that's[br]another possible reason to buy a home. 0:04:52.959,0:04:56.810 - [Alex] Yeah, I do think the forth[br]savings argument has got something to it. 0:04:56.810,0:04:59.990 But there's a big problem, especially[br]in the United States today, 0:04:59.990,0:05:04.620 and that is there's such an encouragement[br]to buy houses with no money down, 0:05:04.620,0:05:09.110 even after the financial crisis. If you[br]really are concerned about savings, 0:05:09.110,0:05:13.439 the key point is to have a 20%[br]down payment. So save up for that 0:05:13.439,0:05:18.689 down payment. And that is really what is[br]going to be the forth savings aspect 0:05:18.689,0:05:19.829 of buying the house. 0:05:19.829,0:05:23.839 - [Tyler] You know, I think the biggest piece[br]of advice I'd give to people is just to be on 0:05:23.839,0:05:27.579 that wealthier side of the equation, so[br]that owning a home makes sense for you. 0:05:27.579,0:05:32.099 - [Alex] Don't forget our earlier investment[br]rule. Diversify, diversify, diversify. 0:05:32.100,0:05:36.379 And yet, when it comes to housing,[br]people are encouraged to put a 0:05:36.379,0:05:41.139 huge amount of their wealth into one[br]asset, in one place in the country. 0:05:41.139,0:05:45.060 That could be a terrible decision. If[br]you're in a small town with only one 0:05:45.060,0:05:50.180 employer, and you have a house and that[br]employer goes bust, well your house price 0:05:50.180,0:05:53.850 is going to fall, you might lose your job,[br]your income is all going to fall, 0:05:53.850,0:05:56.640 and it's all going to be[br]happening concentrated, 0:05:56.639,0:05:58.599 all in one place all at one time. 0:05:59.858,0:06:03.189 - [Announcer] What do you think? To see[br]previous episodes of Econ Duel, 0:06:03.189,0:06:06.959 check out our playlists. Or if you're[br]craving more financial advice, 0:06:06.959,0:06:09.379 click to find out if mutual funds[br]are a good investment. 0:06:09.803,0:06:12.803 ♪ [music] ♪