1 00:00:00,451 --> 00:00:03,451 ♪ (opening music) ♪ 2 00:00:11,150 --> 00:00:14,084 So Alex, we're economists. Often people ask me, 3 00:00:14,092 --> 00:00:18,480 well what is it that we know about investment and investment advice anyway? 4 00:00:18,568 --> 00:00:20,258 Now, we've already talked about equities, 5 00:00:20,449 --> 00:00:23,219 but as economists do we have anything else to tell people? 6 00:00:23,655 --> 00:00:25,353 Let's talk a little bit about housing, 7 00:00:25,599 --> 00:00:28,781 because housing is one of these areas where there's a lot of myths around it. 8 00:00:28,837 --> 00:00:31,535 People in America, it's part of the American Dream. 9 00:00:31,734 --> 00:00:35,892 And one thing I think people don't realize is that over the long run, 10 00:00:36,067 --> 00:00:39,122 house prices are certainly not guaranteed to go up. 11 00:00:39,360 --> 00:00:42,805 I mean we saw in the financial crisis that house prices came way down. 12 00:00:43,100 --> 00:00:45,901 But there's still this kind of idea that people have in their heads 13 00:00:45,902 --> 00:00:48,047 that they're not making any more land, 14 00:00:48,253 --> 00:00:50,949 so in the long run house prices have to go up. 15 00:00:51,100 --> 00:00:53,361 And we know from our understanding of assets 16 00:00:53,385 --> 00:00:57,306 that you should not expect your house to be a great financial investment. 17 00:00:57,680 --> 00:01:00,060 But isn't there a tax reason to buy a home? 18 00:01:00,204 --> 00:01:02,275 So if I borrow money for a mortgage, 19 00:01:02,399 --> 00:01:05,684 and I'm paying income tax and itemizing my deductions, 20 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. 21 00:01:10,108 --> 00:01:10,750 And that means 22 00:01:10,758 --> 00:01:14,879 it could be cheaper or more advantageous to buy the home because of taxes. 23 00:01:14,934 --> 00:01:15,807 But don't forget, 24 00:01:15,831 --> 00:01:20,402 a lot of that tax advantage is going to be captured not by the buyer, 25 00:01:20,521 --> 00:01:21,481 but by the seller. 26 00:01:21,775 --> 00:01:25,314 What the tax advantage means is it pushes up the prices of homes. 27 00:01:25,433 --> 00:01:28,099 It's already built into a higher price, 28 00:01:28,202 --> 00:01:32,798 so you, as the buyer, don't always get that gain. Often it's the seller. 29 00:01:32,886 --> 00:01:35,116 Well, but think of this in terms of elasticity. 30 00:01:35,267 --> 00:01:38,624 Say I live in an area, like many parts of Texas or Florida, 31 00:01:38,886 --> 00:01:43,044 where I get this tax break that increases the demand for homes, yes. 32 00:01:43,290 --> 00:01:46,996 But then suppliers build more homes and they drive the price back down again. 33 00:01:47,297 --> 00:01:49,849 And it seems that in a lot of states actually, 34 00:01:49,849 --> 00:01:53,369 the buyer should be reaping a lot of that tax break. Yes, No? 35 00:01:53,370 --> 00:01:56,886 If only there were more places in the United States like that, 36 00:01:57,040 --> 00:01:58,500 I would tend to agree. 37 00:01:58,627 --> 00:02:02,230 But one of the big problems we have in the United States today is that 38 00:02:02,246 --> 00:02:04,690 the demand for housing goes up and you're in some place 39 00:02:04,691 --> 00:02:07,483 like San Francisco, or New York, or Boston 40 00:02:07,484 --> 00:02:11,101 whereit's impossible to get permits to build more housing. 41 00:02:11,284 --> 00:02:12,588 And when the demand goes up, 42 00:02:12,644 --> 00:02:15,493 all that means is the price of the house goes up. 43 00:02:15,715 --> 00:02:19,087 So all of those gains, whether it's from the tax system, 44 00:02:19,111 --> 00:02:23,125 or whether it's from people wanting to move to San Francisco, 45 00:02:23,159 --> 00:02:25,270 all of those gains go to the land owners. 46 00:02:25,372 --> 00:02:28,459 And that's actually a big problem we have in the United States today. 47 00:02:28,633 --> 00:02:31,259 But I do see a stability reason to own a home. 48 00:02:31,376 --> 00:02:34,384 Say you are 37 years old, you have 2 kids in school, 49 00:02:34,471 --> 00:02:36,860 you want them to go to a good high school district. 50 00:02:36,990 --> 00:02:39,140 You don't want to be told, "You're going to have to move." 51 00:02:39,252 --> 00:02:41,990 You want to arrange your backyard the way you see fit. 52 00:02:42,101 --> 00:02:44,688 And you don't want to have to renegotiate a rent contract. 53 00:02:44,950 --> 00:02:48,418 All of those factors militate in favor of buying a home. 54 00:02:48,664 --> 00:02:50,775 So I think you're right for those people. 55 00:02:50,958 --> 00:02:54,187 But one thing you've got to keep in mind is that on average, 56 00:02:54,385 --> 00:02:57,084 houses are not going to be a great financial investment. 57 00:02:57,496 --> 00:03:00,813 So you have to be exactly one of those people 58 00:03:00,996 --> 00:03:04,830 who wants extra stability, more stability than the average person. 59 00:03:04,902 --> 00:03:06,410 That's when you're going to gain from more stability than the average person. 60 00:03:06,409 --> 00:03:11,439 buying a house. And, keep in mind, that when you buy a house and that heating 61 00:03:11,439 --> 00:03:14,629 system collapses and you've got to repair that, that's a big problem. 62 00:03:14,629 --> 00:03:17,719 When you're hit by a lightning strike and you've got to repair the roof, 63 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 64 00:03:22,889 --> 00:03:26,929 rent going up." Well that's fine. They may be worried about that, 65 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. 66 00:03:30,830 --> 00:03:34,560 - [Tyler] So it's really a marginal question, you're saying. Like at the margin, 67 00:03:34,560 --> 00:03:38,860 do you need the tax break more than the typical buyer? At the margin, 68 00:03:38,860 --> 00:03:42,730 do you value the good high school district more than the typical buyer? 69 00:03:42,729 --> 00:03:46,629 And at the margin, are you better at fixing the broken roof or hiring someone 70 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, 71 00:03:50,560 --> 00:03:52,409 but that's the right way to think about it? 72 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 73 00:03:56,389 --> 00:04:00,459 income than average. You've got to be itemizing your deductions. 74 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 75 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. 76 00:04:08,590 --> 00:04:11,830 Maybe you have to have two before you really get that advantage from the 77 00:04:11,830 --> 00:04:15,090 schooling. So yeah, you've got to be thinking about how you're different from 78 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. 79 00:04:19,230 --> 00:04:24,450 - [Tyler] I think of people as needing to save more typically. That we're programmed to 80 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 81 00:04:28,620 --> 00:04:32,500 think well enough about the more distant future. If you buy a home, 82 00:04:32,500 --> 00:04:36,629 pay off your mortgage at the end of 30, or one hopes 15 years, 83 00:04:36,629 --> 00:04:40,079 you own something. In the meantime, you're saving. And you get into a routine that 84 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 85 00:04:44,069 --> 00:04:48,810 check every month. So maybe it's our own imperfections. We need to lock ourselves 86 00:04:48,810 --> 00:04:52,959 into a higher savings regime, and that's another possible reason to buy a home. 87 00:04:52,959 --> 00:04:56,810 - [Alex] Yeah, I do think the forth savings argument has got something to it. 88 00:04:56,810 --> 00:04:59,990 But there's a big problem, especially in the United States today, 89 00:04:59,990 --> 00:05:04,620 and that is there's such an encouragement to buy houses with no money down, 90 00:05:04,620 --> 00:05:09,110 even after the financial crisis. If you really are concerned about savings, 91 00:05:09,110 --> 00:05:13,439 the key point is to have a 20% down payment. So save up for that 92 00:05:13,439 --> 00:05:18,689 down payment. And that is really what is going to be the forth savings aspect 93 00:05:18,689 --> 00:05:19,829 of buying the house. 94 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 95 00:05:23,839 --> 00:05:27,579 that wealthier side of the equation, so that owning a home makes sense for you. 96 00:05:27,579 --> 00:05:32,099 - [Alex] Don't forget our earlier investment rule. Diversify, diversify, diversify. 97 00:05:32,100 --> 00:05:36,379 And yet, when it comes to housing, people are encouraged to put a 98 00:05:36,379 --> 00:05:41,139 huge amount of their wealth into one asset, in one place in the country. 99 00:05:41,139 --> 00:05:45,060 That could be a terrible decision. If you're in a small town with only one 100 00:05:45,060 --> 00:05:50,180 employer, and you have a house and that employer goes bust, well your house price 101 00:05:50,180 --> 00:05:53,850 is going to fall, you might lose your job, your income is all going to fall, 102 00:05:53,850 --> 00:05:56,640 and it's all going to be happening concentrated, 103 00:05:56,639 --> 00:05:58,599 all in one place all at one time. 104 00:05:59,858 --> 00:06:03,189 (narrator) What do you think? To see previous episodes of Econ Duel, 105 00:06:03,189 --> 00:06:06,959 check out our playlists. Or if you're craving more financial advice, 106 00:06:06,959 --> 00:06:09,379 click to find out if mutual funds are a good investment. 107 00:06:09,803 --> 00:06:12,803 ♪ [music] ♪