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