[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.45,0:00:03.45,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:11.15,0:00:15.38,Default,,0000,0000,0000,,- [Tyler] So Alex, we're economists. Often\Npeople ask me, well what is it that we
Dialogue: 0,0:00:15.38,0:00:19.44,Default,,0000,0000,0000,,know about investment and investment\Nadvice anyway? Now, we've already talked
Dialogue: 0,0:00:19.44,0:00:23.13,Default,,0000,0000,0000,,about equities, but as economists do we\Nhave anything else to tell people?
Dialogue: 0,0:00:23.13,0:00:26.84,Default,,0000,0000,0000,,- [Alex] Let's talk a little bit about\Nhousing, because housing is one of these
Dialogue: 0,0:00:26.84,0:00:29.70,Default,,0000,0000,0000,,areas where there's a lot of myths\Naround it. People in America,
Dialogue: 0,0:00:29.70,0:00:34.84,Default,,0000,0000,0000,,it's part of the American Dream. And one\Nthing I think people don't realize is that
Dialogue: 0,0:00:34.84,0:00:39.17,Default,,0000,0000,0000,,over the long run, house prices are\Ncertainly not guaranteed to go up.
Dialogue: 0,0:00:39.17,0:00:43.10,Default,,0000,0000,0000,,I mean we saw in the financial crisis\Nthat house prices came way down.
Dialogue: 0,0:00:43.10,0:00:46.58,Default,,0000,0000,0000,,But there's still this kind of idea that\Npeople have in their heads that they're
Dialogue: 0,0:00:46.58,0:00:51.17,Default,,0000,0000,0000,,not making any more land, so in the\Nlong run house prices have to go up.
Dialogue: 0,0:00:51.17,0:00:54.85,Default,,0000,0000,0000,,And we know from our understanding of\Nassets that you should not expect your
Dialogue: 0,0:00:54.85,0:00:57.45,Default,,0000,0000,0000,,house to be a great financial investment.
Dialogue: 0,0:00:57.45,0:01:02.40,Default,,0000,0000,0000,,- [Tyler] But isn't there a tax reason to buy a\Nhome? So if I borrow money for a mortgage,
Dialogue: 0,0:01:02.40,0:01:07.49,Default,,0000,0000,0000,,and I'm paying income tax and itemizing my\Ndeductions, I can write off a lot of that
Dialogue: 0,0:01:07.49,0:01:11.16,Default,,0000,0000,0000,,mortgage interest and get some of the\Nmoney back. And that means it could be
Dialogue: 0,0:01:11.16,0:01:14.88,Default,,0000,0000,0000,,cheaper or more advantageous to\Nbuy the home because of taxes.
Dialogue: 0,0:01:14.88,0:01:19.73,Default,,0000,0000,0000,,- [Alex] But don't forget, a lot of that tax\Nadvantage is going to be captured not by
Dialogue: 0,0:01:19.73,0:01:24.69,Default,,0000,0000,0000,,the buyer, but by the seller. What the tax\Nadvantage means is it pushes up the prices
Dialogue: 0,0:01:24.69,0:01:29.79,Default,,0000,0000,0000,,of homes. It's already built into a\Nhigher price, so you, as the buyer,
Dialogue: 0,0:01:29.79,0:01:32.80,Default,,0000,0000,0000,,don't always get that gain.\NOften it's the seller.
Dialogue: 0,0:01:32.80,0:01:36.40,Default,,0000,0000,0000,,- [Tyler] Well, but think of this in\Nterms of elasticity. Say I live in an area,
Dialogue: 0,0:01:36.40,0:01:41.63,Default,,0000,0000,0000,,like many parts of Texas or Florida, where\NI get this tax break that increases the
Dialogue: 0,0:01:41.63,0:01:46.14,Default,,0000,0000,0000,,demand for homes, yes. But then suppliers\Nbuild more homes and they drive the price
Dialogue: 0,0:01:46.14,0:01:49.85,Default,,0000,0000,0000,,back down again. And it seems that\Nin a lot of states actually,
Dialogue: 0,0:01:49.85,0:01:53.37,Default,,0000,0000,0000,,the buyer should be reaping a lot\Nof that tax break. Yes, No?
Dialogue: 0,0:01:53.37,0:01:57.16,Default,,0000,0000,0000,,- [Alex] If only there were more places\Nin the United States like that,
Dialogue: 0,0:01:57.16,0:02:00.85,Default,,0000,0000,0000,,I would tend to agree. But one of the big\Nproblems we have in the United States
Dialogue: 0,0:02:00.85,0:02:05.11,Default,,0000,0000,0000,,today is that the demand for housing goes\Nup and you're in some place like San
Dialogue: 0,0:02:05.11,0:02:10.24,Default,,0000,0000,0000,,Francisco, or New York, or Boston where\Nit's impossible to get permits to build
Dialogue: 0,0:02:10.24,0:02:14.89,Default,,0000,0000,0000,,more housing. And when the demand goes up,\Nall that means is the price of the house
Dialogue: 0,0:02:14.89,0:02:19.14,Default,,0000,0000,0000,,goes up. So all of those gains,\Nwhether it's from the tax system,
Dialogue: 0,0:02:19.14,0:02:24.08,Default,,0000,0000,0000,,or whether it's from people wanting to\Nmove to San Francisco, all of those gains
Dialogue: 0,0:02:24.08,0:02:28.39,Default,,0000,0000,0000,,go to the land owners. And that's actually\Na big problem we have in the United States today.
Dialogue: 0,0:02:28.39,0:02:32.92,Default,,0000,0000,0000,,- [Tyler] But I do see a stability reason\Nto own a home. Say you're 37 years old,
Dialogue: 0,0:02:32.92,0:02:36.99,Default,,0000,0000,0000,,you have 2 kids in school, you want them\Nto go to a good high school district.
Dialogue: 0,0:02:36.99,0:02:40.27,Default,,0000,0000,0000,,You don't want to be told, "You're going\Nto have to move." You want to arrange your
Dialogue: 0,0:02:40.27,0:02:44.11,Default,,0000,0000,0000,,backyard the way you see fit. And you\Ndon't want to have to renegotiate a rent
Dialogue: 0,0:02:44.11,0:02:48.42,Default,,0000,0000,0000,,contract. All of those factors\Nmilitate in favor of buying a home.
Dialogue: 0,0:02:48.42,0:02:52.16,Default,,0000,0000,0000,,- [Alex] So I think you're right for those\Npeople. But one thing you've got to keep
Dialogue: 0,0:02:52.16,0:02:56.49,Default,,0000,0000,0000,,in mind, is that on average, houses are\Nnot going to be a great financial
Dialogue: 0,0:02:56.49,0:03:02.55,Default,,0000,0000,0000,,investment. So you have to be exactly one\Nof those people who wants extra stability,
Dialogue: 0,0:03:02.55,0:03:06.41,Default,,0000,0000,0000,,more stability than the average person.\NThat's when you're going to gain from
Dialogue: 0,0:03:06.41,0:03:11.44,Default,,0000,0000,0000,,buying a house. And, keep in mind, that\Nwhen you buy a house and that heating
Dialogue: 0,0:03:11.44,0:03:14.63,Default,,0000,0000,0000,,system collapses and you've got to\Nrepair that, that's a big problem.
Dialogue: 0,0:03:14.63,0:03:17.72,Default,,0000,0000,0000,,When you're hit by a lightning strike\Nand you've got to repair the roof,
Dialogue: 0,0:03:17.72,0:03:22.89,Default,,0000,0000,0000,,that's a big expense as well. So when\Npeople say, "I'm only worried about the
Dialogue: 0,0:03:22.89,0:03:26.93,Default,,0000,0000,0000,,rent going up." Well that's fine.\NThey may be worried about that,
Dialogue: 0,0:03:26.93,0:03:30.83,Default,,0000,0000,0000,,but don't forget, you've got to be worried\Nabout replacing the roof every 20 years, as well.
Dialogue: 0,0:03:30.83,0:03:34.56,Default,,0000,0000,0000,,- [Tyler] So it's really a marginal question,\Nyou're saying. Like at the margin,
Dialogue: 0,0:03:34.56,0:03:38.86,Default,,0000,0000,0000,,do you need the tax break more than\Nthe typical buyer? At the margin,
Dialogue: 0,0:03:38.86,0:03:42.73,Default,,0000,0000,0000,,do you value the good high school district\Nmore than the typical buyer?
Dialogue: 0,0:03:42.73,0:03:46.63,Default,,0000,0000,0000,,And at the margin, are you better at\Nfixing the broken roof or hiring someone
Dialogue: 0,0:03:46.63,0:03:50.56,Default,,0000,0000,0000,,to do it than the average buyer? And those\Nthings may or may not apply to you,
Dialogue: 0,0:03:50.56,0:03:52.41,Default,,0000,0000,0000,,but that's the right way\Nto think about it?
Dialogue: 0,0:03:52.41,0:03:56.39,Default,,0000,0000,0000,,- [Alex] Exactly right, so if you want that\Ntax advantage, you've got to be earning more
Dialogue: 0,0:03:56.39,0:04:00.46,Default,,0000,0000,0000,,income than average. You've got to\Nbe itemizing your deductions.
Dialogue: 0,0:04:00.46,0:04:04.29,Default,,0000,0000,0000,,If you're not one of those people in the\Nupper middle class, you're not going to
Dialogue: 0,0:04:04.29,0:04:08.59,Default,,0000,0000,0000,,get that tax advantage. If you've got one\Nkid, maybe the school is not so important.
Dialogue: 0,0:04:08.59,0:04:11.83,Default,,0000,0000,0000,,Maybe you have to have two before you\Nreally get that advantage from the
Dialogue: 0,0:04:11.83,0:04:15.09,Default,,0000,0000,0000,,schooling. So yeah, you've got to be\Nthinking about how you're different from
Dialogue: 0,0:04:15.09,0:04:19.23,Default,,0000,0000,0000,,the average. If you really want to buy a\Nhome, you've got to love buying a home.
Dialogue: 0,0:04:19.23,0:04:24.45,Default,,0000,0000,0000,,- [Tyler] I think of people as needing to save\Nmore typically. That we're programmed to
Dialogue: 0,0:04:24.45,0:04:28.62,Default,,0000,0000,0000,,think about the here and now, we're a bit\Nimpatient. Perhaps we haven't evolved to
Dialogue: 0,0:04:28.62,0:04:32.50,Default,,0000,0000,0000,,think well enough about the more\Ndistant future. If you buy a home,
Dialogue: 0,0:04:32.50,0:04:36.63,Default,,0000,0000,0000,,pay off your mortgage at the end of 30,\Nor one hopes 15 years,
Dialogue: 0,0:04:36.63,0:04:40.08,Default,,0000,0000,0000,,you own something. In the meantime, you're\Nsaving. And you get into a routine that
Dialogue: 0,0:04:40.08,0:04:44.07,Default,,0000,0000,0000,,doesn't even feel like saving. It's more\Nsavings than if you're writing a rent
Dialogue: 0,0:04:44.07,0:04:48.81,Default,,0000,0000,0000,,check every month. So maybe it's our own\Nimperfections. We need to lock ourselves
Dialogue: 0,0:04:48.81,0:04:52.96,Default,,0000,0000,0000,,into a higher savings regime, and that's\Nanother possible reason to buy a home.
Dialogue: 0,0:04:52.96,0:04:56.81,Default,,0000,0000,0000,,- [Alex] Yeah, I do think the forth\Nsavings argument has got something to it.
Dialogue: 0,0:04:56.81,0:04:59.99,Default,,0000,0000,0000,,But there's a big problem, especially\Nin the United States today,
Dialogue: 0,0:04:59.99,0:05:04.62,Default,,0000,0000,0000,,and that is there's such an encouragement\Nto buy houses with no money down,
Dialogue: 0,0:05:04.62,0:05:09.11,Default,,0000,0000,0000,,even after the financial crisis. If you\Nreally are concerned about savings,
Dialogue: 0,0:05:09.11,0:05:13.44,Default,,0000,0000,0000,,the key point is to have a 20%\Ndown payment. So save up for that
Dialogue: 0,0:05:13.44,0:05:18.69,Default,,0000,0000,0000,,down payment. And that is really what is\Ngoing to be the forth savings aspect
Dialogue: 0,0:05:18.69,0:05:19.83,Default,,0000,0000,0000,,of buying the house.
Dialogue: 0,0:05:19.83,0:05:23.84,Default,,0000,0000,0000,,- [Tyler] You know, I think the biggest piece\Nof advice I'd give to people is just to be on
Dialogue: 0,0:05:23.84,0:05:27.58,Default,,0000,0000,0000,,that wealthier side of the equation, so\Nthat owning a home makes sense for you.
Dialogue: 0,0:05:27.58,0:05:32.10,Default,,0000,0000,0000,,- [Alex] Don't forget our earlier investment\Nrule. Diversify, diversify, diversify.
Dialogue: 0,0:05:32.10,0:05:36.38,Default,,0000,0000,0000,,And yet, when it comes to housing,\Npeople are encouraged to put a
Dialogue: 0,0:05:36.38,0:05:41.14,Default,,0000,0000,0000,,huge amount of their wealth into one\Nasset, in one place in the country.
Dialogue: 0,0:05:41.14,0:05:45.06,Default,,0000,0000,0000,,That could be a terrible decision. If\Nyou're in a small town with only one
Dialogue: 0,0:05:45.06,0:05:50.18,Default,,0000,0000,0000,,employer, and you have a house and that\Nemployer goes bust, well your house price
Dialogue: 0,0:05:50.18,0:05:53.85,Default,,0000,0000,0000,,is going to fall, you might lose your job,\Nyour income is all going to fall,
Dialogue: 0,0:05:53.85,0:05:56.64,Default,,0000,0000,0000,,and it's all going to be\Nhappening concentrated,
Dialogue: 0,0:05:56.64,0:05:58.60,Default,,0000,0000,0000,,all in one place all at one time.
Dialogue: 0,0:05:59.86,0:06:03.19,Default,,0000,0000,0000,,- [Announcer] What do you think? To see\Nprevious episodes of Econ Duel,
Dialogue: 0,0:06:03.19,0:06:06.96,Default,,0000,0000,0000,,check out our playlists. Or if you're\Ncraving more financial advice,
Dialogue: 0,0:06:06.96,0:06:09.38,Default,,0000,0000,0000,,click to find out if mutual funds\Nare a good investment.
Dialogue: 0,0:06:09.80,0:06:12.80,Default,,0000,0000,0000,,♪ [music] ♪