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So Alex, we're economists.[br]Often people ask me,

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well what is it that we know about[br]investment and investment advice anyway?

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Now, we've already talked about equities,

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but as economists do we have[br]anything else to tell people?

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Let's talk a little bit about housing,

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because housing is one of these areas[br]where there's a lot of myths around it.

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People in America,[br]it's part of the American Dream.

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And one thing I think people don't[br]realize is that over the long run,

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house prices are certainly[br]not guaranteed to go up.

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

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But there's still this kind of idea[br]that people have in their heads

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that they're not making any more land,

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so in the long run[br]house prices have to go up.

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And we know from our[br]understanding of assets

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that you should not expect your house[br]to be a great financial investment.

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But isn't there a tax reason[br]to buy a home?

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So if I borrow money for a mortgage,

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and I'm paying income tax[br]and itemizing my deductions,

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I can write off a lot of that mortgage[br]interest and get some of the money back.

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And that means

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it could be cheaper or more advantageous[br]to buy the home because of taxes.

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But don't forget,

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a lot of that tax advantage is going[br]to be captured not by the buyer,

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but by the seller.

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What the tax advantage means is[br]it pushes up the prices of homes.

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It's already built into a higher price,

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so you, as the buyer, don't always [br]get that gain. Often it's the seller.

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Well, but think of this[br]in terms of elasticity.

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Say I live in an area, like[br]many parts of Texas or Florida,

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where I get this tax break that[br]increases the demand for homes, yes.

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But then suppliers build more homes and[br]they drive the price back down again.

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And it seems that[br]in a lot of states actually,

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

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

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I would tend to agree.

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But one of the big problems we have[br]in the United States today is that

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the demand for housing goes up [br]and you're in some place

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like San Francisco, or New York, or Boston

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whereit's impossible [br]to get permits to build more housing.

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And when the demand goes up,

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all that means is [br]the price of the house goes up.

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So all of those gains,[br]whether it's from the tax system,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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down payment. And that is really what is[br]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[br]of advice I'd give to people is just to be on

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

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

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

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

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

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

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

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and it's all going to be[br]happening concentrated,

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all in one place all at one time.

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<i>(narrator) What do you think? To see[br]previous episodes of Econ Duel,</i>

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