0:00:00.451,0:00:03.451 ♪ (opening music) ♪ 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. 0:02:11.284,0:02:12.588 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. 0:02:25.372,0:02:28.459 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. 0:02:42.101,0:02:44.688 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, 0:03:09.479,0:03:12.336 that when you buy a house and[br]that heating system collapses 0:03:12.352,0:03:14.535 and you've got to repair that,[br]that's a big problem. 0:03:14.552,0:03:17.551 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. 0:03:25.519,0:03:27.669 They may be worried about that, [br]but don't forget, 0:03:27.701,0:03:30.709 you've got to be worried about [br]replacing the roof every 20 years, as well. 0:03:31.123,0:03:34.591 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, 0:03:43.950,0:03:45.783 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? 0:03:48.792,0:03:50.593 And those things may or [br]may not apply to you, 0:03:50.609,0:03:52.408 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, 0:04:03.698,0:04:05.507 you're not going to get[br]that tax advantage. 0:04:05.682,0:04:08.324 If you've got one kid, maybe [br]the school is not so important. 0:04:08.380,0:04:11.830 Maybe you have to have two before you[br]really get that advantage from the 0:04:11.830,0:04:15.090 schooling. So yeah, you've got to be[br]thinking about how you're different from 0:04:15.090,0:04:19.230 the average. If you really want to buy a[br]home, you've got to love buying a home. 0:04:19.230,0:04:24.450 - [Tyler] I think of people as needing to save[br]more typically. That we're programmed to 0:04:24.449,0:04:28.620 think about the here and now, we're a bit[br]impatient. Perhaps we haven't evolved to 0:04:28.620,0:04:32.500 think well enough about the more[br]distant future. If you buy a home, 0:04:32.500,0:04:36.629 pay off your mortgage at the end of 30,[br]or one hopes 15 years, 0:04:36.629,0:04:40.079 you own something. In the meantime, you're[br]saving. And you get into a routine that 0:04:40.079,0:04:44.069 doesn't even feel like saving. It's more[br]savings than if you're writing a rent 0:04:44.069,0:04:48.810 check every month. So maybe it's our own[br]imperfections. We need to lock ourselves 0:04:48.810,0:04:52.959 into a higher savings regime, and that's[br]another possible reason to buy a home. 0:04:52.959,0:04:56.810 - [Alex] Yeah, I do think the forth[br]savings argument has got something to it. 0:04:56.810,0:04:59.990 But there's a big problem, especially[br]in the United States today, 0:04:59.990,0:05:04.620 and that is there's such an encouragement[br]to buy houses with no money down, 0:05:04.620,0:05:09.110 even after the financial crisis. If you[br]really are concerned about savings, 0:05:09.110,0:05:13.439 the key point is to have a 20%[br]down payment. So save up for that 0:05:13.439,0:05:18.689 down payment. And that is really what is[br]going to be the forth savings aspect 0:05:18.689,0:05:19.829 of buying the house. 0:05:19.829,0:05:23.839 - [Tyler] You know, I think the biggest piece[br]of advice I'd give to people is just to be on 0:05:23.839,0:05:27.579 that wealthier side of the equation, so[br]that owning a home makes sense for you. 0:05:27.579,0:05:32.099 - [Alex] Don't forget our earlier investment[br]rule. Diversify, diversify, diversify. 0:05:32.100,0:05:36.379 And yet, when it comes to housing,[br]people are encouraged to put a 0:05:36.379,0:05:41.139 huge amount of their wealth into one[br]asset, in one place in the country. 0:05:41.139,0:05:45.060 That could be a terrible decision. If[br]you're in a small town with only one 0:05:45.060,0:05:50.180 employer, and you have a house and that[br]employer goes bust, well your house price 0:05:50.180,0:05:53.850 is going to fall, you might lose your job,[br]your income is all going to fall, 0:05:53.850,0:05:56.640 and it's all going to be[br]happening concentrated, 0:05:56.639,0:05:58.599 all in one place all at one time. 0:05:59.858,0:06:03.189 (narrator) What do you think? To see[br]previous episodes of Econ Duel, 0:06:03.189,0:06:06.959 check out our playlists. Or if you're[br]craving more financial advice, 0:06:06.959,0:06:09.379 click to find out if mutual funds[br]are a good investment. 0:06:09.803,0:06:12.803 ♪ [music] ♪