0:00:11.150,0:00:14.084 So Alex, we're economists.[br]Often people ask me, 0:00:14.092,0:00:18.480 well what is it that we know about[br]investment and investment advice anyway? 0:00:18.568,0:00:20.258 Now, we've already talked about equities, 0:00:20.449,0:00:23.219 but as economists do we have[br]anything else to tell people? 0:00:23.655,0:00:25.353 Let's talk a little bit about housing, 0:00:25.599,0:00:28.781 because housing is one of these areas[br]where there's a lot of myths around it. 0:00:28.837,0:00:31.535 People in America,[br]it's part of the American Dream. 0:00:31.734,0:00:35.892 And one thing I think people don't[br]realize is that over the long run, 0:00:36.067,0:00:39.122 house prices are certainly[br]not guaranteed to go up. 0:00:39.360,0:00:42.805 I mean we saw in the financial crisis[br]that house prices came way down. 0:00:43.100,0:00:45.901 But there's still this kind of idea[br]that people have in their heads 0:00:45.902,0:00:48.047 that they're not making any more land, 0:00:48.253,0:00:50.949 so in the long run[br]house prices have to go up. 0:00:51.100,0:00:53.361 And we know from our[br]understanding of assets 0:00:53.385,0:00:57.306 that you should not expect your house[br]to be a great financial investment. 0:00:57.680,0:01:00.060 But isn't there a tax reason[br]to buy a home? 0:01:00.204,0:01:02.275 So if I borrow money for a mortgage, 0:01:02.399,0:01:05.684 and I'm paying income tax[br]and itemizing my deductions, 0:01:05.895,0:01:10.054 I can write off a lot of that mortgage[br]interest and get some of the money back. 0:01:10.108,0:01:10.750 And that means 0:01:10.758,0:01:14.879 it could be cheaper or more advantageous[br]to buy the home because of taxes. 0:01:14.934,0:01:15.807 But don't forget, 0:01:15.831,0:01:20.402 a lot of that tax advantage is going[br]to be captured not by the buyer, 0:01:20.521,0:01:21.481 but by the seller. 0:01:21.775,0:01:25.314 What the tax advantage means is[br]it pushes up the prices of homes. 0:01:25.433,0:01:28.099 It's already built into a higher price, 0:01:28.202,0:01:32.798 so you, as the buyer, don't always[br]get that gain. Often it's the seller. 0:01:32.886,0:01:35.116 Well, but think of this[br]in terms of elasticity. 0:01:35.267,0:01:38.624 Say I live in an area, like[br]many parts of Texas or Florida, 0:01:38.886,0:01:43.044 where I get this tax break that[br]increases the demand for homes, yes. 0:01:43.290,0:01:46.996 But then suppliers build more homes and[br]they drive the price back down again. 0:01:47.297,0:01:49.849 And it seems that[br]in a lot of states actually, 0:01:49.849,0:01:53.369 the buyer should be reaping a lot[br]of that tax break. Yes, No? 0:01:53.370,0:01:56.886 If only there were more places[br]in the United States like that, 0:01:57.040,0:01:58.500 I would tend to agree. 0:01:58.627,0:02:02.230 But one of the big problems we have[br]in the United States today is that 0:02:02.246,0:02:04.690 the demand for housing goes up[br]and you're in some place 0:02:04.691,0:02:07.483 like San Francisco, or New York, or Boston 0:02:07.484,0:02:11.101 whereit's impossible[br]to get permits to build more housing. 0:02:11.164,0:02:12.588 And when the demand goes up, 0:02:12.644,0:02:15.493 all that means is[br]the price of the house goes up. 0:02:15.715,0:02:19.087 So all of those gains, whether[br]it's from the tax system, 0:02:19.111,0:02:23.125 or whether it's from people[br]wanting to move to San Francisco, 0:02:23.159,0:02:25.270 all of those gains go to the land owners. 0:02:25.302,0:02:28.569 And that's actually a big problem[br]we have in the United States today. 0:02:28.633,0:02:31.259 But I do see a stability reason[br]to own a home. 0:02:31.376,0:02:34.384 Say you are 37 years old,[br]you have 2 kids in school, 0:02:34.471,0:02:36.860 you want them to go to a[br]good high school district. 0:02:36.990,0:02:39.140 You don't want to be told,[br]"You're going to have to move." 0:02:39.252,0:02:41.990 You want to arrange your backyard[br]the way you see fit. 0:02:42.101,0:02:44.898 And you don't want to have to renegotiate[br]a rent contract. 0:02:44.950,0:02:48.418 All of those factors militate[br]in favor of buying a home. 0:02:48.664,0:02:50.775 So I think you're right for those people. 0:02:50.958,0:02:54.187 But one thing you've got to keep in mind[br]is that on average, 0:02:54.385,0:02:57.084 houses are not going to be[br]a great financial investment. 0:02:57.496,0:03:00.813 So you have to be exactly[br]one of those people 0:03:00.996,0:03:04.830 who wants extra stability,[br]more stability than the average person. 0:03:04.973,0:03:07.457 That's when you're going to gain[br]from buying a house. 0:03:07.591,0:03:09.170 And, keep in mind, 0:03:09.479,0:03:12.292 that when you buy a house and[br]that heating system collapses 0:03:12.292,0:03:14.565 and you've got to repair that,[br]that's a big problem. 0:03:14.565,0:03:17.701 When you're hit by a lightning strike[br]and you've got to repair the roof, 0:03:17.710,0:03:19.615 that's a big expense as well. 0:03:19.775,0:03:23.693 So when people say, "I'm only[br]worried about the rent going up." 0:03:24.098,0:03:25.193 Well that's fine. 0:03:25.389,0:03:27.739 They may be worried about that,[br]but don't forget, 0:03:27.739,0:03:31.139 you've got to be worried about[br]replacing the roof every 20 years, as well. 0:03:31.139,0:03:34.591 So it's really a marginal question,[br]you're saying. Like at the margin, 0:03:34.845,0:03:37.900 do you need the tax break[br]more than the typical buyer? 0:03:38.036,0:03:38.861 At the margin, 0:03:38.869,0:03:42.519 do you value the good high school district[br]more than the typical buyer? 0:03:42.729,0:03:43.800 And at the margin, 0:03:43.820,0:03:45.783 are you better at fixing the broken roof 0:03:45.800,0:03:48.768 or hiring someone to do it[br]than the average buyer? 0:03:48.772,0:03:50.613 And those things may or[br]may not apply to you, 0:03:50.613,0:03:52.618 but that's the right way[br]to think about it? 0:03:52.710,0:03:55.186 Exactly right, so if you[br]want that tax advantage, 0:03:55.298,0:03:57.829 you've got to be earning[br]more income than average. 0:03:57.900,0:04:00.352 You've got to be[br]itemizing your deductions. 0:04:00.404,0:04:03.571 If you're not one of those people[br]in the upper middle class, 0:04:03.608,0:04:05.617 you're not going to get[br]that tax advantage. 0:04:05.622,0:04:08.374 If you've got one kid, maybe[br]the school is not so important. 0:04:08.394,0:04:09.658 Maybe you have to have two 0:04:09.666,0:04:12.325 before you really get that[br]advantage from the schooling. 0:04:12.466,0:04:15.704 So yeah, you've got to be thinking about[br]how you're different from the average. 0:04:15.965,0:04:19.221 If you really want to buy a home,[br]you've got to love buying a home. 0:04:19.522,0:04:23.133 I think of people as needing[br]to save more typically. 0:04:23.403,0:04:25.847 That we're programmed to think about[br]the here and now, 0:04:25.982,0:04:27.037 we're a bit impatient. 0:04:27.180,0:04:30.886 Perhaps we haven't evolved to think well[br]enough about the more distant future. 0:04:31.196,0:04:32.411 If you buy a home, 0:04:32.500,0:04:37.293 pay off your mortgage at the end of 30,[br]or one hopes 15 years, you own something. 0:04:37.317,0:04:38.777 In the meantime, you're saving. 0:04:38.809,0:04:41.642 And you get into a routine that[br]doesn't even feel like saving. 0:04:42.023,0:04:44.991 It's more savings than if you're[br]writing a rent check every month. 0:04:45.363,0:04:47.093 So maybe it's our own imperfections. 0:04:47.094,0:04:50.458 We need to lock ourselves[br]into a higher savings regime, 0:04:50.459,0:04:52.920 and that's another possible reason[br]to buy a home. 0:04:52.959,0:04:56.514 Yeah, I do think the forth savings[br]argument has got something to it. 0:04:56.810,0:05:00.111 But there's a big problem, especially[br]in the United States today, 0:05:00.135,0:05:04.620 and that is there's such an encouragement[br]to buy houses with no money down, 0:05:04.620,0:05:06.389 even after the financial crisis. 0:05:06.755,0:05:08.930 If you really are concerned about savings, 0:05:09.110,0:05:14.229 the key point is to have a 20% down[br]payment. So save up for that down payment. 0:05:14.593,0:05:16.545 And that is really what is going to be 0:05:16.569,0:05:19.665 the forth savings aspect[br]of buying the house. 0:05:20.059,0:05:22.869 You know, I think the biggest piece[br]of advice I'd give to people 0:05:22.948,0:05:25.543 is just to be on that[br]wealthier side of the equation, 0:05:25.694,0:05:27.805 so that owning a home[br]makes sense for you. 0:05:27.978,0:05:32.780 Don't forget our earlier investment[br]rule: Diversify, diversify, diversify. 0:05:33.066,0:05:34.621 And yet, when it comes to housing, 0:05:34.851,0:05:39.359 people are encouraged to put a huge[br]amount of their wealth into one asset, 0:05:39.446,0:05:41.200 in one place in the country. 0:05:41.414,0:05:43.040 That could be a terrible decision. 0:05:43.192,0:05:45.667 If you're in a small town[br]with only one employer, 0:05:45.882,0:05:48.675 and you have a house and [br]that employer goes bust, 0:05:49.088,0:05:50.769 well your house price is going to fall, 0:05:50.770,0:05:53.802 you might lose your job,[br]your income is all going to fall, 0:05:54.080,0:05:56.373 and it's all going to be[br]happening concentrated, 0:05:56.532,0:05:58.599 all in one place all at one time. 0:05:59.858,0:06:03.215 (narrator) What do you think? To see[br]previous episodes of Econ Duel, 0:06:03.246,0:06:06.959 check out our playlists. Or if you're[br]craving more financial advice, 0:06:06.959,0:06:09.726 click to find out if mutual funds [br]are a good investment.