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- [Tyler] So Alex, we're economists. Often
people ask me, well what is it that we

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know about investment and investment
advice anyway? Now, we've already talked

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about equities, but as economists do we
have anything else to tell people?

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- [Alex] Let's talk a little bit about
housing, because housing is one of these

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areas where there's a lot of myths
around it. People in America,

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it's part of the American Dream. And one
thing I think people don't realize is that

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over the long run, house prices are
certainly not guaranteed to go up.

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I mean we saw in the financial crisis
that house prices came way down.

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But there's still this kind of idea that
people have in their heads that they're

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not making any more land, so in the
long run house prices have to go up.

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And we know from our understanding of
assets that you should not expect your

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house to be a great financial investment.

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- [Tyler] But isn't there a tax reason to buy a
home? So if I borrow money for a mortgage,

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and I'm paying income tax and itemizing my
deductions, I can write off a lot of that

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mortgage interest and get some of the
money back. And that means it could be

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cheaper or more advantageous to
buy the home because of taxes.

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- [Alex] But don't forget, a lot of that tax
advantage is going to be captured not by

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the buyer, but by the seller. What the tax
advantage means is it pushes up the prices

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of homes. It's already built into a
higher price, so you, as the buyer,

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don't always get that gain.
Often it's the seller.

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- [Tyler] Well, but think of this in
terms of elasticity. Say I live in an area,

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like many parts of Texas or Florida, where
I get this tax break that increases the

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demand for homes, yes. But then suppliers
build more homes and they drive the price

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back down again. And it seems that
in a lot of states actually,

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the buyer should be reaping a lot
of that tax break. Yes, No?

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- [Alex] If only there were more places
in the United States like that,

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I would tend to agree. But one of the big
problems we have in the United States

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today is that the demand for housing goes
up and you're in some place like San

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Francisco, or New York, or Boston where
it's impossible to get permits to build

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more housing. And when the demand goes up,
all that means is the price of the house

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goes up. So all of those gains,
whether it's from the tax system,

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or whether it's from people wanting to
move to San Francisco, all of those gains

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go to the land owners. And that's actually
a big problem we have in the United States today.

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- [Tyler] But I do see a stability reason
to own a home. Say you're 37 years old,

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you have 2 kids in school, you want them
to go to a good high school district.

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You don't want to be told, "You're going
to have to move." You want to arrange your

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backyard the way you see fit. And you
don't want to have to renegotiate a rent

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contract. All of those factors
militate in favor of buying a home.

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- [Alex] So I think you're right for those
people. But one thing you've got to keep

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in mind, is that on average, houses are
not going to be a great financial

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investment. So you have to be exactly one
of those people who wants extra stability,

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more stability than the average person.
That's when you're going to gain from

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buying a house. And, keep in mind, that
when you buy a house and that heating

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system collapses and you've got to
repair that, that's a big problem.

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When you're hit by a lightning strike
and you've got to repair the roof,

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that's a big expense as well. So when
people say, "I'm only worried about the

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rent going up." Well that's fine.
They may be worried about that,

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but don't forget, you've got to be worried
about replacing the roof every 20 years, as well.

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- [Tyler] So it's really a marginal question,
you're saying. Like at the margin,

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do you need the tax break more than
the typical buyer? At the margin,

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do you value the good high school district
more than the typical buyer?

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And at the margin, are you better at
fixing the broken roof or hiring someone

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to do it than the average buyer? And those
things may or may not apply to you,

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but that's the right way
to think about it?

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- [Alex] Exactly right, so if you want that
tax advantage, you've got to be earning more

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income than average. You've got to
be itemizing your deductions.

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If you're not one of those people in the
upper middle class, you're not going to

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get that tax advantage. If you've got one
kid, maybe the school is not so important.

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Maybe you have to have two before you
really get that advantage from the

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schooling. So yeah, you've got to be
thinking about how you're different from

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the average. If you really want to buy a
home, you've got to love buying a home.

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- [Tyler] I think of people as needing to save
more typically. That we're programmed to

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think about the here and now, we're a bit
impatient. Perhaps we haven't evolved to

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think well enough about the more
distant future. If you buy a home,

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pay off your mortgage at the end of 30,
or one hopes 15 years,

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you own something. In the meantime, you're
saving. And you get into a routine that

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doesn't even feel like saving. It's more
savings than if you're writing a rent

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check every month. So maybe it's our own
imperfections. We need to lock ourselves

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into a higher savings regime, and that's
another possible reason to buy a home.

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- [Alex] Yeah, I do think the forth
savings argument has got something to it.

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But there's a big problem, especially
in the United States today,

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and that is there's such an encouragement
to buy houses with no money down,

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even after the financial crisis. If you
really are concerned about savings,

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the key point is to have a 20%
down payment. So save up for that

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down payment. And that is really what is
going to be the forth savings aspect

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of buying the house.

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- [Tyler] You know, I think the biggest piece
of advice I'd give to people is just to be on

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that wealthier side of the equation, so
that owning a home makes sense for you.

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- [Alex] Don't forget our earlier investment
rule. Diversify, diversify, diversify.

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And yet, when it comes to housing,
people are encouraged to put a

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huge amount of their wealth into one
asset, in one place in the country.

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That could be a terrible decision. If
you're in a small town with only one

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employer, and you have a house and that
employer goes bust, well your house price

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is going to fall, you might lose your job,
your income is all going to fall,

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and it's all going to be
happening concentrated,

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all in one place all at one time.

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- [Announcer] What do you think? To see
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