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[Tyler] 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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[Alex] 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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where it'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, whether[br]it's from the tax system,

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

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all of those gains go to the land owners.

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

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But I do see a stability reason[br]to own a home.

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Say you're 37 years old,[br]you have 2 kids in school,

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you want them to go to a[br]good high school district.

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

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You want to arrange your backyard[br]the way you see fit.

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And you don't want to have to renegotiate[br]a rent contract.

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

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So I think you're right for those people.

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But one thing you've got to keep in mind[br]is that on average,

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houses are not going to be[br]a great financial investment.

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So you have to be exactly[br]one of those people

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who wants extra stability,[br]more stability than the average person.

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That's when you're going to gain[br]from buying a house.

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And, keep in mind,

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that when you buy a house and[br]that heating system collapses

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and you've got to repair that,[br]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.

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So when people say, "I'm only[br]worried about the rent going up."

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Well that's fine.

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They may be worried about that,[br]but don't forget,

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you've got to be worried about replacing[br]the roof every 20 years, as well.

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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[br]more than the typical buyer?

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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,

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are you better at fixing the broken roof

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or hiring someone to do it[br]than the average buyer?

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And those things may or[br]may not apply to you,

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

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Exactly right, so if you[br]want that tax advantage,

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you've got to be earning[br]more income than average.

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

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

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you're not going to get[br]that tax advantage.

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

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Maybe you have to have two

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before you really get that[br]advantage from the schooling.

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

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

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I think of people as needing[br]to save more typically,

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that we're programmed to think about[br]the here and now,

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we're a bit impatient.

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Perhaps we haven't evolved to think well[br]enough about the more distant future.

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If you buy a home,

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

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In the meantime, you're saving.

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and you get into a routine that[br]doesn't even feel like saving.

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It's more savings than if you're[br]writing a rent check every month.

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So maybe it's our own imperfections.

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We need to lock ourselves[br]into a higher savings regime,

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and that's another possible reason[br]to buy a home.

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Yeah, I do think the forth savings[br]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.

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If you really are concerned about savings,

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

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And that is really what is going to be

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the forth savings aspect[br]of buying the house.

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You know, I think the biggest piece[br]of advice I'd give to people

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is just to be on that[br]wealthier side of the equation,

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so that owning a home[br]makes sense for you.

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

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And yet, when it comes to housing,

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people are encouraged to put a huge[br]amount of their wealth into one asset,

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in one place in the country.

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That could be a terrible decision.

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If you're in a small town[br]with only one employer,

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

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well your house price is going to fall,

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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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