1 00:00:11,150 --> 00:00:14,084 So Alex, we're economists. Often people ask me, 2 00:00:14,092 --> 00:00:18,480 well what is it that we know about investment and investment advice anyway? 3 00:00:18,568 --> 00:00:20,258 Now, we've already talked about equities, 4 00:00:20,449 --> 00:00:23,219 but as economists do we have anything else to tell people? 5 00:00:23,655 --> 00:00:25,353 Let's talk a little bit about housing, 6 00:00:25,599 --> 00:00:28,781 because housing is one of these areas where there's a lot of myths around it. 7 00:00:28,837 --> 00:00:31,535 People in America, it's part of the American Dream. 8 00:00:31,734 --> 00:00:35,892 And one thing I think people don't realize is that over the long run, 9 00:00:36,067 --> 00:00:39,122 house prices are certainly not guaranteed to go up. 10 00:00:39,360 --> 00:00:42,805 I mean we saw in the financial crisis that house prices came way down. 11 00:00:43,100 --> 00:00:45,901 But there's still this kind of idea that people have in their heads 12 00:00:45,902 --> 00:00:48,047 that they're not making any more land, 13 00:00:48,253 --> 00:00:50,949 so in the long run house prices have to go up. 14 00:00:51,100 --> 00:00:53,361 And we know from our understanding of assets 15 00:00:53,385 --> 00:00:57,306 that you should not expect your house to be a great financial investment. 16 00:00:57,680 --> 00:01:00,060 But isn't there a tax reason to buy a home? 17 00:01:00,204 --> 00:01:02,275 So if I borrow money for a mortgage, 18 00:01:02,399 --> 00:01:05,684 and I'm paying income tax and itemizing my deductions, 19 00:01:05,895 --> 00:01:10,054 I can write off a lot of that mortgage interest and get some of the money back. 20 00:01:10,108 --> 00:01:10,750 And that means 21 00:01:10,758 --> 00:01:14,879 it could be cheaper or more advantageous to buy the home because of taxes. 22 00:01:14,934 --> 00:01:15,807 But don't forget, 23 00:01:15,831 --> 00:01:20,402 a lot of that tax advantage is going to be captured not by the buyer, 24 00:01:20,521 --> 00:01:21,481 but by the seller. 25 00:01:21,775 --> 00:01:25,314 What the tax advantage means is it pushes up the prices of homes. 26 00:01:25,433 --> 00:01:28,099 It's already built into a higher price, 27 00:01:28,202 --> 00:01:32,798 so you, as the buyer, don't always get that gain. Often it's the seller. 28 00:01:32,886 --> 00:01:35,116 Well, but think of this in terms of elasticity. 29 00:01:35,267 --> 00:01:38,624 Say I live in an area, like many parts of Texas or Florida, 30 00:01:38,886 --> 00:01:43,044 where I get this tax break that increases the demand for homes, yes. 31 00:01:43,290 --> 00:01:46,996 But then suppliers build more homes and they drive the price back down again. 32 00:01:47,297 --> 00:01:49,849 And it seems that in a lot of states actually, 33 00:01:49,849 --> 00:01:53,369 the buyer should be reaping a lot of that tax break. Yes, No? 34 00:01:53,370 --> 00:01:56,886 If only there were more places in the United States like that, 35 00:01:57,040 --> 00:01:58,500 I would tend to agree. 36 00:01:58,627 --> 00:02:02,230 But one of the big problems we have in the United States today is that 37 00:02:02,246 --> 00:02:04,690 the demand for housing goes up and you're in some place 38 00:02:04,691 --> 00:02:07,483 like San Francisco, or New York, or Boston 39 00:02:07,484 --> 00:02:11,101 whereit's impossible to get permits to build more housing. 40 00:02:11,284 --> 00:02:12,588 And when the demand goes up, 41 00:02:12,644 --> 00:02:15,493 all that means is the price of the house goes up. 42 00:02:15,715 --> 00:02:19,087 So all of those gains, whether it's from the tax system, 43 00:02:19,111 --> 00:02:23,125 or whether it's from people wanting to move to San Francisco, 44 00:02:23,159 --> 00:02:25,270 all of those gains go to the land owners. 45 00:02:25,372 --> 00:02:28,459 And that's actually a big problem we have in the United States today. 46 00:02:28,633 --> 00:02:31,259 But I do see a stability reason to own a home. 47 00:02:31,376 --> 00:02:34,384 Say you are 37 years old, you have 2 kids in school, 48 00:02:34,471 --> 00:02:36,860 you want them to go to a good high school district. 49 00:02:36,990 --> 00:02:39,140 You don't want to be told, "You're going to have to move." 50 00:02:39,252 --> 00:02:41,990 You want to arrange your backyard the way you see fit. 51 00:02:42,101 --> 00:02:44,688 And you don't want to have to renegotiate a rent contract. 52 00:02:44,950 --> 00:02:48,418 All of those factors militate in favor of buying a home. 53 00:02:48,664 --> 00:02:50,775 So I think you're right for those people. 54 00:02:50,958 --> 00:02:54,187 But one thing you've got to keep in mind is that on average, 55 00:02:54,385 --> 00:02:57,084 houses are not going to be a great financial investment. 56 00:02:57,496 --> 00:03:00,813 So you have to be exactly one of those people 57 00:03:00,996 --> 00:03:04,830 who wants extra stability, more stability than the average person. 58 00:03:04,973 --> 00:03:07,457 That's when you're going to gain from buying a house. 59 00:03:07,591 --> 00:03:09,170 And, keep in mind, 60 00:03:09,479 --> 00:03:12,336 that when you buy a house and that heating system collapses 61 00:03:12,352 --> 00:03:14,535 and you've got to repair that, that's a big problem. 62 00:03:14,552 --> 00:03:17,551 When you're hit by a lightning strike and you've got to repair the roof, 63 00:03:17,710 --> 00:03:19,615 that's a big expense as well. 64 00:03:19,775 --> 00:03:23,693 So when people say, "I'm only worried about the rent going up." 65 00:03:24,098 --> 00:03:25,193 Well that's fine. 66 00:03:25,519 --> 00:03:27,669 They may be worried about that, but don't forget, 67 00:03:27,701 --> 00:03:30,709 you've got to be worried about replacing the roof every 20 years, as well. 68 00:03:31,123 --> 00:03:34,591 So it's really a marginal question, you're saying. Like at the margin, 69 00:03:34,845 --> 00:03:37,900 do you need the tax break more than the typical buyer? 70 00:03:38,036 --> 00:03:38,861 At the margin, 71 00:03:38,869 --> 00:03:42,519 do you value the good high school district more than the typical buyer? 72 00:03:42,729 --> 00:03:43,800 And at the margin, 73 00:03:43,950 --> 00:03:45,783 are you better at fixing the broken roof 74 00:03:45,800 --> 00:03:48,768 or hiring someone to do it than the average buyer? 75 00:03:48,792 --> 00:03:50,593 And those things may or may not apply to you, 76 00:03:50,609 --> 00:03:52,408 but that's the right way to think about it? 77 00:03:52,710 --> 00:03:55,186 Exactly right, so if you want that tax advantage, 78 00:03:55,298 --> 00:03:57,829 you've got to be earning more income than average. 79 00:03:57,900 --> 00:04:00,352 You've got to be itemizing your deductions. 80 00:04:00,404 --> 00:04:03,571 If you're not one of those people in the upper middle class, 81 00:04:03,698 --> 00:04:05,507 you're not going to get that tax advantage. 82 00:04:05,682 --> 00:04:08,324 If you've got one kid, maybe the school is not so important. 83 00:04:08,380 --> 00:04:09,658 Maybe you have to have two 84 00:04:09,666 --> 00:04:12,325 before you really get that advantage from the schooling. 85 00:04:12,466 --> 00:04:15,704 So yeah, you've got to be thinking about how you're different from the average. 86 00:04:15,965 --> 00:04:19,221 If you really want to buy a home, you've got to love buying a home. 87 00:04:19,522 --> 00:04:23,133 I think of people as needing to save more typically. 88 00:04:23,403 --> 00:04:25,847 That we're programmed to think about the here and now, 89 00:04:25,982 --> 00:04:27,037 we're a bit impatient. 90 00:04:27,180 --> 00:04:30,886 Perhaps we haven't evolved to think well enough about the more distant future. 91 00:04:31,196 --> 00:04:32,411 If you buy a home, 92 00:04:32,500 --> 00:04:37,293 pay off your mortgage at the end of 30, or one hopes 15 years, you own something. 93 00:04:37,317 --> 00:04:38,777 In the meantime, you're saving. 94 00:04:38,809 --> 00:04:41,642 And you get into a routine that doesn't even feel like saving. 95 00:04:42,023 --> 00:04:44,991 It's more savings than if you're writing a rent check every month. 96 00:04:45,363 --> 00:04:47,093 So maybe it's our own imperfections. 97 00:04:47,094 --> 00:04:50,458 We need to lock ourselves into a higher savings regime, 98 00:04:50,459 --> 00:04:52,920 and that's another possible reason to buy a home. 99 00:04:52,959 --> 00:04:56,514 Yeah, I do think the forth savings argument has got something to it. 100 00:04:56,810 --> 00:05:00,111 But there's a big problem, especially in the United States today, 101 00:05:00,135 --> 00:05:04,620 and that is there's such an encouragement to buy houses with no money down, 102 00:05:04,620 --> 00:05:06,389 even after the financial crisis. 103 00:05:06,755 --> 00:05:08,930 If you really are concerned about savings, 104 00:05:09,110 --> 00:05:14,229 the key point is to have a 20% down payment. So save up for that down payment. 105 00:05:14,593 --> 00:05:16,545 And that is really what is going to be 106 00:05:16,569 --> 00:05:19,665 the forth savings aspect of buying the house. 107 00:05:20,059 --> 00:05:22,869 You know, I think the biggest piece of advice I'd give to people 108 00:05:22,948 --> 00:05:25,543 is just to be on that wealthier side of the equation, 109 00:05:25,694 --> 00:05:27,805 so that owning a home makes sense for you. 110 00:05:27,978 --> 00:05:32,780 Don't forget our earlier investment rule: Diversify, diversify, diversify. 111 00:05:33,066 --> 00:05:34,621 And yet, when it comes to housing, 112 00:05:34,851 --> 00:05:39,359 people are encouraged to put a huge amount of their wealth into one asset, 113 00:05:39,446 --> 00:05:41,200 in one place in the country. 114 00:05:41,414 --> 00:05:43,040 That could be a terrible decision. 115 00:05:43,192 --> 00:05:45,667 If you're in a small town with only one employer, 116 00:05:45,882 --> 00:05:48,675 and you have a house and that employer goes bust, 117 00:05:49,088 --> 00:05:50,769 well your house price is going to fall, 118 00:05:50,770 --> 00:05:53,802 you might lose your job, your income is all going to fall, 119 00:05:54,080 --> 00:05:56,373 and it's all going to be happening concentrated, 120 00:05:56,532 --> 00:05:58,599 all in one place all at one time. 121 00:05:59,858 --> 00:06:03,215 (narrator) What do you think? 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