Episode 358 – Dr. Eli Beracha: Renting versus Buying a Home

25:00It forces them to be long-term holders. It forces them to not look at the price every day. Yes, they can check on Zillow daily. Valuation from Zillow are smooth and there's other issues there. And they hold it for a long period of time. And over time, even if the appreciation is not very high, it is large in dollar amounts, because we're talking about large amount of dollars going into that versus compared to most people net worth. That's why most people will tell you this is the best investment ever made, even if it's not. Even if it's not, but they might be right for the wrong reasons, I think is how you describe it in one of your papers.

25:35Anyway, we're going to come back later and ask you what you think most people should do, because I think after we've had the whole discussion, your answer to that question will be very interesting. In this 2012 paper, you basically find that renting comes at a head most of the time throughout your sample. Have you followed the results from that paper out of sample since it was published? We have. We've been publishing a different version of those results with an index of buy versus rent since then. And overall, the results are similar. I mean, they change from one period to the next, but overall, they're similar.

26:06Yes. If there is a sort of well-established, at least based on the findings of your studies, that renting comes out ahead most of the time. What are the reasons why people still prefer owning a home if financially there's some evidence that it's not the best decision long-term? I think, first of all, the number of people that read my academic paper that is 45 pages long and have some mathematical equations and graphs and it's printed in black and white and it's not on Instagram available readily, it's not very many. So I don't think this fact is very well known. Also, there's no much reason for, let's say, the National Association of Realtors to advertise that.

26:47I think most people are not aware of it. That's number one. The number two is, again, this is part of the American dream. They want to have ownership. And that is the main reason why people still buy. They still believe that renting is throwing money away, paying your landlord's mortgage, etc. Now, don't get me wrong. There's a lot of benefits of owning because we talk about, again, the monetary versus the non-monetory. But I think people are just not aware of these type of analysis. When I do it in my classroom, and again, remember, those are students that are coming to study about real estate at a master's level.

27:20So those are people that already have interest in real estate. Many of them are in real estate. They do not know anything about that. When I tell them that renting for the majority part coming ahead, they're like scratching their head. How can that be? I want to come back real quick to something. that you emphasized a couple of times earlier, but I just want to make sure listeners caught it, is the difference between a single property. When you're talking about volatility matching a portfolio of stocks and bonds to the volatility of a real estate asset, I think a lot of people are familiar with the volatility of real estate indexes, which are smooth because of valuation lags and because they're diversified.

27:53But when you own a home or a condo or whatever, you own one, you live in one thing because it's a large indivisible asset. And so the volatility of that one thing is going to be very different from a portfolio, even if the stocks are more volatile on an individual basis, the single real estate asset is likely closer to the volatility of a diversified portfolio of stocks. You emphasized that a couple of times, Elliot, but I just want to make sure listeners caught that difference. Yes, it is very different. For example, we know that if you take 100 years of data in the stock market and the index, the standard deviation is somewhere around 20%, depends what period you're looking at.

28:29And the standard deviation of an average stock is about 50 % over that time period, that ratio of between 20 and 50, which is two and a half times, we find pretty similar ratio when you're looking at indices versus single homes in terms of volatility. So yes, there's greater volatility. And yes, you do own only one home, which is another somewhat disadvantage of owning a home because when you own a portfolio of stocks, It's easy to own a portfolio. You can just buy SPY, whatever it is, index. When you buy a home, you can't really buy a portfolio of homes. At least most people can't. Yeah, most people can't.

29:09In the 2012 paper, you look at both the ex-ante and ex-post performance of renting relative to buying. How does the ex-ante probability that renting is preferred change throughout the sample? Are there periods where renting looks relatively good or bad? For example, if you're looking at the XNT, it changes. So when housing price appreciates significantly and rent does not follow. So think about a period of, let's say, 2000 until 2006. And during that time, prices went up significantly and rent didn't change much because everybody wanted to own. So there wasn't much demand for rental. And again, it threw the model into, it was screaming, do not buy right now.

29:51And what do people do? Let's buy. And then they're surprised there's a bubble. Now, it doesn't mean that I know exactly when the collapse is coming, but there are some periods where it's pretty obvious that one outcome will come ahead of the other. The other periods where it's not obvious, the odds are tilted a little bit one way versus another, but there's some periods like that extreme that the ex-ante was basically telling you the probability of you coming ahead, only at that time, is very small over, again, extend period of time of eight years. Very interesting. Ex-ante, just for any listeners that aren't familiar, means like before the fact, like evaluating before the fact.

30:27When we do ex-ante, we pretend we don't know what happened after. So we're feeding the model-only data that was available at that time, let's say 2006. Of course, at that time, for the paper, we knew what happened after. But we pretend we don't by feeding the model-only data before that. The ex-post is with all the information, whatever we know that maybe we didn't know at that time when we made the decision. You mentioned your rent versus buy index. Can you talk about how that index works? So the index is basically modeled after the same horse race comparison that I described before, except we wanted something that is easier to interpret and understand by the average reader, somebody who want to make a buy versus rent decision for themselves.

31:13So we standardize it between negative one and one within three-stand deviation above and three-stand deviation below, basically the probability of should it be buying, should it be renting? On average at index, we force it to be zero on average. So that means every time you're above that, the probability of buying and being ahead is higher. And every time you're below that, the probability of renting and being ahead is higher. That's how we calibrate it. It's the same model, just calibrate it. So people can look at between negative one and one, it's easy to interpret. How has the advice implied by that index changed?

31:50What did it say when you published the paper and then how did it change afterwards? Well, 2012, basically coming out of the Great Recession, at that time, if you're looking at the model in 2009, then it tells you, you should be buying. And guess what? At that time, really nobody was buying because you're crazy. Real estate is the worst thing in the world right now. But it came out of equilibrium. 2012, it was still in advice to buy rather than rent, but not quite as much. The real estate market surprised me, the model. I was still bullish on real estate in general, but I think it better than we expected.

32:29So even at times that the probability of owning were lower, we know that we set ahead. Because if you bought a house in 2012, 13, 14, 15, almost any of those times, hold it for eight years. In the U.S., on average, you benefited from unusual price appreciation, which you're ahead of renting a home. Just to clarify, so it's a national index, right? It uses house prices from all over the U.S. because there will be obviously a lot of local variation. Yes. So we did one that was national. In the paper, we do one for every of the four regions. The index we did for national plus 23 other cities. And now we're running different indices that are not necessarily buy versus rent, but kind of an evolution of that price premium indices.

33:17We do it for the 100 largest metros in the country. And what is it saying now in terms of favorability of buying versus renting? Right now, there is a slight to moderate favorability, depending on the area, toward renting, but it doesn't screen that. There's one thing that the model does not consider, and maybe it's due for some, I guess, correction or tweaking there, because it does consider, again, the price of the home, the price of the rent, the expected price appreciation, interest rates, cost of ownership, like insurance, property tax, et cetera, and some reversion to the mean. What it doesn't consider is the overall supply demand equilibrium in the market in terms of the number of homes that we have in the market versus what we actually have.

34:02We know that in the United States right now, there is a severe shortage of housing. If you really think about it, looking at numbers, around 2006, 2007, we had a surplus. So we have too many homes, about 3 million homes altogether. And then we know what happened. Too many homes, whatever happened with the economy, and basically severe housing price collapse. At that time, basically all construction virtually stopped. and we're building significantly less homes than we needed every year since 2008, 9, 10, 11, 12. I'm talking about 300, 400, 500 ,000 homes less than we need. When I say we need, we need an amount of home in order to support natural population growth, that is immigration and natural birth and flu exceed mortality.

34:54And at the same time, about one to one and a half percent replacement of the existing stock because housing gets obsolete. Some houses have become unusable at some point. Those need to be replaced. So in those years, talking about between 2007, 2012, we built about 400 ,000 to 500 ,000 homes less than we need and we'll reach equilibrium at that time. But guess what? Since 2012 until 2023 or so, we continue to build too few homes. That's a long time. That's another 12 years after you reach equilibrium that you continue to build too few homes. And that is because a lot of the builders went bankrupt.

35:34Those that did not go bankrupt just became a lot more cautious and did less. We created ourselves around 2023, 2024, a shortage of 4 million homes. Since then, we build about the same or maybe slightly more than we need, but it's a drop in the bucket that we're still somewhere between 3.7 and 3.9 million homes shortage. That's a big number. Add to the fact that not only it's a shortage, there is one thing about having a shortage. Let's say you have a shortage of iPads in one location. You ship from one place, you have too many to a place where you don't have enough. In housing, we know it doesn't happen.

36:11You can have a surplus in one location and a shortage somewhere else. Maybe overall, you have the right amount of housing, but you don't have it in the right places and you still have shortage. in places where people want to be. And we know that COVID changed where people want to be. COVID changed type of property that people want to live in. A lot of those things. So that number that is 4 million of shortage is without considering that location need. So to put this supply demand in balance, that should fit also in the model in a dozen. And that is probably why we got higher price appreciation than the model would expect without considering that.

36:52The model can't be perfect. Otherwise, it would just be reality. Well, we can always improve it, but I'm always working on something. That's good to hear. I look forward to the updated version. You gave that example where the model did not work, but more generally when you've studied it, how well does the index predict house price movements? We had a paper that tested that against what actually happened. The predictability is extremely high. not so much in a sense that the models say it will increase by 4.5%, increase at 4.5%. I'm not talking about that type of predictability. I'm talking about the predictability that if you are predicting, let's say, the 23 markets or 100 markets, and you say these markets will perform better than the other ones, they generally do.

37:36And those markets will perform worse than other ones, they generally do. That predictability is extremely high. And actually, I use that model. I don't know if you're familiar with the post-nomic survey that they have. Basically, they're asking leading real estate economists and real estate experts. They're asking them about price appreciation over the next few years. And I'm one of those people filling that survey. It's about 150 of us. They publish our opinion. And then they go back and say, okay, here's what you thought. A few years later, here's what happened. So among 150 or so economists, research professionals that guess or model or whatever it is, how they made a prediction, I end up as number one in that prediction.

38:18So I actually just received the award. That's pretty cool. A master forecaster, yeah. Master forecaster or a good model. Yeah, I guess I was showing the show. They gave me a crystal ball for the crystal ball. But answer your questions of how well it predicts. The idea is that, of course, the future is unknown. But if you use good data, Then you have models that are based on real factors and fundamentals. You're going to be wrong in the short run. You're going to be a little bit off on the upside, downside each period. But on average, you're going to be correct. And that's really what we try to do.

38:53It sounds a lot like discount rates in stocks. You can look at the Shiller earnings yield and say expected returns are low. And that's usually not good enough to predict market returns in a way that you can time the market to profit. but it is kind of useful where it explains some portion of future returns. It sounds kind of similar. I like the Buffett answer even more or the approach. The weighing machine versus voting machine kind of thing. So in the short run, it's voting and the long term is a weighing machine. Even Buffett himself will tell you that he can never predict what's going to happen over the next year.

39:26And somebody to tell you that they do, they're either full or they're lying to you. But over a long period of time, it is quite easy to say, okay, over the next 10 years, stocks will do better than they did over the last 10 years or worse. This is really what he's doing. So you have this great model in the horse race analysis that you talked about. We can show that, hey, the wealth of renters should come out ahead of owners most of the time. And I think that makes a lot of sense for all the reasons we've talked about. The reality though, is that homeowners tend to be way wealthier. Like in Canada, it's many multiples wealthier.

39:58Why? If we can show analytically that renting can come out ahead, why do owners tend to be so much wealthier? I would say it's not because of owning a home. It's in spite of owning a home. And I hear that a lot. If renting is so great, how all the renters are not as wealthy. And the idea is that it's a selection price. People that are wealthy can afford to buy a home. People that are not wealthy, not have enough down payment, cannot maybe qualify for mortgage, and then they don't. The idea is that you're not wealthy because you own a home, almost in many cases in spite of, but also really if you think about it, again, I mentioned before, it is a force mechanism for saving.

40:42It makes you disciplined. You buy a home and you're not going to sell it a month from now because your neighbor just sold it for 5 % more than you bought it and you think you can also get 5 % more. People would do it with a stock or they would panic if it's go the other way around. But with home, you basically have this force mechanism that is not only it appreciates at least in nominal terms over time. You also decrease your debt over time simply by paying off your mortgage. And we're talking about a large amount of money. Most people invest in the stock market, for example. Again, I'm talking about the average person.

41:19They wouldn't just, oh, you know, so I'm going to just put the initial investment at$350 ,000. They don't. Most people, okay, I'll invest$5 ,000. And here's another$500. And here's another$1 ,500. So even if the performance there is high, we're talking about a relatively small amount of dollars. If you think about it, there are so many people that have homes that are worth$400 ,000,$500 ,000,$600 ,000,$800 ,000. But the stock portfolio is maybe$50 ,000. I mean, there are a lot less people that have$800 ,000 portfolio. All but the very rich, their home is worth significantly more than their stock bond portfolio.

41:56So it's really a selection bias for the most part. When people compare or look at how their wealth grows as a homeowner, I think the number one factor that they believe to be the generator of that wealth is price appreciation in the homes. And I think a lot of people believe that in general, houses go up in value at least as fast as stocks tend to go up in value, maybe more. So can you talk about how important property appreciation truly is? And if it's not the most important factor here, then what is? Property appreciation is the most important factor in creating wealth when you own it is. But property appreciation is by far not as fast as return on stocks.

42:45And it shouldn't be because really you're getting out of benefit from living in a home. It is a place where you live, where you raise your family. So that benefit, you can think about it as a cash flow because if you would not live in your own home, you'd pay somebody else. whatever that home is worth every month. So together, the two should be maybe somewhat comparable to a commercial real estate return between price appreciation and what you would have paid yourself in rent. But price appreciation by itself is not nearly as high as stock appreciation. It can't be. Let me emphasize it because it's important.

43:22We're talking about price appreciation versus inflation. And basically, price appreciation and inflation are very, very, very similar, which means that home prices on average do not appreciate in real terms. When I say real terms, I mean adjusted for inflation. And that means that if you have no real price appreciation, but at the same time you have to pay insurance, property taxes, maintenance, you basically from a financial perspective in real term, you're losing money every year. It's like, well, how does it make sense? Well, yes, it's not that you lose money. It's the cost of living in the home.

43:57You're living it out, but this is the benefit that you're getting. If you look at real estate index returns, especially in recent history, they look pretty high. I was talking to some of the people from Statistics Canada recently, and I figured out how to isolate the amount of renovation spending that Canadians do every year from their data. And it's huge because the proportion of the net housing stock in Canada is massive. And so you look at index returns, a meaningful portion of that has come from people spending, not just on maintenance and depreciation, but on renovations, like on property improvements.

44:25Yeah. And there are indices that consider that. Okay. But commercial real estate, they consider that. People will be surprised that, for example, the CapEx or the expenditure on repair of offices is very high with less low for retail, even less so on multifamily, very low for industrial storage, et cetera. But regardless, all of our universe is a big number. And again, when people are thinking about, okay, I bought this house for$200 ,000 and sold it later for$400 ,000. And let's say it was over a 10-year period. So I doubled my money. It's like, well, you know, you really have to think about it.

45:02First of all, you're talking nominal or if, well, most people don't really understand the difference, but it is a very important distinction. And the other thing is that what happened in those 10 years? Did you pay insurance? Yes. Did you pay property taxes? Yes. Did you fix this, that? Did you renovate the kitchen? Did you renovate it? The answer to those, almost all of those is yes. Yet, they don't tell you that. They just said, I bought for$200 ,000, I sold for$400 ,000, so I made$200 ,000. And they ignore everything that happened in the middle. It's almost like if I invested$10 ,000 in the stock market, I added$500 every month.

45:39And then I would be surprised that I have a lot more, significantly more, 10 years later, of course, not only because stocks appreciate, because you continue to add money. But those are things that homeowners tend to ignore. They know it happened, but nobody would say, I bought for 200, 400 ,000 minus the 150 that I spend in discounted and adjust for risk. People don't calculate this way, which is okay. They're not academics. Finance is not what they do, but it makes their statement of, I double my money, or this is the best investment ever made. It makes it often wrong or at the very least inaccurate.

46:15Yeah. Yeah, I think the other piece in there is compounding. They'll see what they bought for and what they sold for, but they won't consider the time that has passed. And over a very long period of time, you can get a really big dollar amount, but the compound return is actually really small, especially relative to some other investment like stocks. Can you talk about how important the renter's savings rate is for them to have a comparable wealth outcome to an owner? Again, the model is pointing to renters doing better than owners if they do all the right things, meaning that investing in a right combination of stocks and bonds, if they are taking the down payment and investing it in a portfolio, also the additional cost of closing and any differential amounts.

46:55In reality, people don't. You asked before, for example, why renters are less wealthy than homeowners. So one thing is a selection bias, those that can buy, buy. But even more than that, if you know that you need, let's say, to save$60 ,000 for down payment, you would make a real effort to get there. That by itself moves you ahead. So you're going to give up a lot of other things. You save this$60 ,000. Now you buy a home. It also means that you are a person of different character that we're able to put together and save enough$60 ,000. So you're not tempted by things along the way. That's another one of those factors that make homeowners better off.

47:38It's interesting that you mentioned that because I think a real world experiment that you can use to see this tendency. I work with a lot of clients who had a year or two left in their mortgage, and they would say to us, as soon as my mortgage is paid off, I'm going to take that$3 ,000 a month that I was paying to my mortgage, and I'm going to start saving $3 ,000 a month. And almost nobody does it. And that is a real testament to this idea of forced savings is a lot easier than optional savings. You don't have a choice between paying your mortgage and not paying the mortgage, but you do have a choice between saving and spending.

48:20And just for most of us, the spending just comes so much easier. I have very rarely seen people making that transition from forced savings to optional savings. And I think the renter is making that decision every month because there's no forced savings. For most people, actually the best decision from a monetary perspective is still to own a home, even though if you do the perfect horse race comparison and you do all the right thing, you should be a ranger. but owning a home still works for most people because it changes the way they behave in a way that more disciplined investor for saving, long-term holder, et cetera, et cetera, et cetera, work in order to get to this down payment, upgrading their home because once you have a home, it's nice, but after a while, it's like, well, but can we get a bigger one?

49:13And then you continue that cycle. And that's why most, at least American owners, the majority of the wealth is the equity to have in your home. I do want to come back to that question later. I want to ask about who should rent, even if we agree that most people should buy. I did a YouTube video on this that has not been released yet. It'll come out this Sunday at the time that we're recording. I say that most people should probably own a home, but then I joke that the nerds watching my YouTube channel about finance are not most people. I'm going to come back to that later. We've been talking about rent versus zone in fairly general terms, but homes are an asset that can fit into the overall household portfolio.

49:49Can you talk about the paper that you did and how you set the model up to compare the risk-adjusted wealth accumulation of renter and owner households? So we followed up this study with another study that instead of just looking buy versus rent in a vacuum, because you always take a step farther of, okay, a home is one of the things that we have in our portfolio. And then you say, well, you know, is buying a home makes sense when it's not the only thing, but it's one additional thing that you have in your portfolio. And the results are basically such that it makes homeownership a little bit more attractive than if it looks in a vacuum because it has some hedging characteristics in addition to the other things you have in your portfolio.

50:31The problem is for most people, people that don't have a lot of wealth, They have very little of other things beside homes. And then home become too big part of their portfolio. So again, the example of a middle-class family that may own almost by default because house appreciates so much. They own a$500 ,000 home, but they really have a stock portfolio of$50 ,000. And by the way, their net worth is$500 ,000. They maybe have a mortgage there of$300 ,000. So the net worth is maybe$250 ,000. But the home is twice as much as the net worth because a home is worth$500 ,000. That brings them this over leverage, high volatility, et cetera.

51:11And for those families, owning a home is still less of a dangerous than renting, again, from a portfolio perspective. Where it makes sense to own a home from a portfolio perspective is where owning a home and the down payment to owning that home is not too big part of your overall portfolio. Meaning that let's say you have a Mildor net worth and you can put$200 ,000 into a down payment for home. The other$800 ,000 is best in somewhere else. Maybe take a$300 ,000 mortgage. But in those cases, homes have hedging characteristics that make it a good buy. In addition to all the things that we cannot measure.

51:51That's really interesting. So someone who's relatively high net worth, buying a home, making the home on an asset that's part of their broader portfolio actually looks pretty good on a risk-adjusted basis. But if you're overreaching to buy a home and it's your only asset, you're making yourself worse off. And also overreaching is a problem that a lot of people have. I tell people, you should decide whether you want to take a 30-year mortgage or a 15-year mortgage. But I'm telling you, if you cannot afford to take a 15-year mortgage, you probably should not be buying a home. Well, but I'm not taking a 15.

52:23I'm taking a 30. Well, that's okay. You can still choose to take a 30. But if you cannot take a 15, that means you're stretching yourself too tight. And that means the first thing that is going to come along, whatever it is, major repair, et cetera, you're not going to be able to handle that. You may be getting into financial distress and the outcome is typically not favorable. Owning a home kind of sucks. I rented for a very long time. I bought a house four years ago now and it's brutal. It's not fun. What is it that you don't like about it? Is it the headaches, the maintenance? That's what I mean.

52:53I like the house that we bought and I like where we live, but you hear a noise and it costs$10 ,000. That part's not that fun. So it sounds like from what you just said, Ellie, for Dan and I, who tend to work with relatively high net worth investors, in their case, owning a home probably makes sense because it hedges their housing costs and it fits into their overall portfolio. It probably does. It also makes a lot of sense in places where if you're really looking at a boom city, and I happen to live in Miami, and really the only way that you can hedge the cost of living effectively is by buying.

53:29So Miami, and I don't know how many of you viewers are probably aware, the cost of living in Miami increased over time because it became a more and more attractive place to live, in the opinion of, I guess, the consumer. But it's really increased significantly during COVID and after COVID. So housing prices doubled and more than doubled in many cases. It became a very expensive place to live. And some people are leaving the town because it's too expensive. Those people that leave town and tell you it's too expensive, those are not people that own it. People that own a home, they basically locked the biggest item on their, whatever, the budget, which is home ownership, home cost or mortgage, whatever it is.

54:06It's a fixed rate most of the time. The increase in taxes are capped by law here. Yes, insurance is volatile, but still not a huge part of the mortgage. So they're not being forced to leave. The people that need to be forced to leave are those that used to rent a place for$2 ,500, but now it's$6 ,000. And it really happened over a three or four year period. If you cannot afford these$6 ,000 instead of$25 ,000, and most people can't, you have to find a solution. Buying a home makes a lot of sense for those areas where you have a limited amount of land and there is something happening in the city and the area that may make it prohibitively unaffordable.

54:46And Miami is one of those places. So again, people here, they ask me, should I buy your rent? And I tell them again, here's the analysis, what happened in average, et cetera. But really, if you really want to protect yourself and you want to stay living in Miami for a while, you probably should buy. And that is one thing. And then if you want to hedge all the rest of the cost of leaving Miami or any other place, then you should buy yourself a rental property. That again, you hedge your own cost of living by buying your own home. And then as a city getting more expensive, if you own a rental property, whether it's a fourplex or townhomes, whatever it is, the rent that you receive is now a lot higher, allow you to do the other things that the city is asking more for.

55:26And those tend to be highly correlated. So it's not like grocery costs are going up and private schooling costs are going up and then rent doesn't. It typically go hand in hand. So I'm not saying one-to-one, but it's probably the closest hedge you can get. If you own a rental property and you own your own home in the area we live, it is extremely unlikely you're going to be kicked out of that city because it becomes unaffordable to you. That's my favorite argument for owning. I completely agree. The thing that I'm always careful to say though, is that a hedge can cut both ways. If living costs are going up in a city, great.

56:01But I look at Toronto in March, 2022, it was$1.3 million for a composite index to buy a home. And as of March, 2025, it's just over a million. It's great if living costs are going up, if housing costs are going up, but you have to be really certain you're going to stay there for a long time because is the person that bought in Toronto in 2022 and decided to leave now. And that's the thing. If you decide to leave from Toronto to a different place, I understand. But also, if they decide to leave, I'm assuming they're going to be moving to another city in Canada, most likely, where probably the price, it's unlikely, even though it's possible, it also went down.

56:42So they are selling for 20 % less, but also buying something else for 20 % less. And those that are not selling, you have to think about it. And again, we have a lot of discussion about that. Your house went up from a million to 800 ,000. But guess what? Your house is still a three-bedroom, two-bath house. It's still in the same neighborhood, the same amenities in the same school. You didn't really decrease your lifestyle because of that. It is different if your portfolio is going down or if your income is coming down or if any kind of benefit you receive changed. But in this case, the amenities you receive from that home It's the exact same amount.

57:17It's the same size, same neighborhood. It's the same benefit you receive every month. It's just less. And even more so on the upside, if you really think about it, people that feel richer because they have a property that they bought for half a million, now it's a million. They have more net worth, but the lifestyle did not change. They still live in the same place, same neighborhood, same size apartment, et cetera, et cetera, et cetera. The only thing that changed for them is that it becomes more difficult for them to upgrade their home because now prices double. So their property went from half a million to a million.

57:49Let's say that historically they can add$100 ,000 or$200 ,000 and get a significantly better home that they wanted at some time, but couldn't afford them. Now it's not$100 ,000 or$200 ,000 or more. Now it's$400 ,000 or$600 ,000 or more. Okay. Makes more difficult to make it to the next level. Yes, it's going both ways, but it's clearly a hedge. And you really have to think about your housing wealth and how much wealth you generate by increasing the value of your homes does not really change your quality of life. To me, somebody who's wealthier is somebody who can afford a higher quality of life.

58:26If you just have more dollars to your net worth, but your lifestyle is the same, then it depends on what definition you use, but I would say you're not wealthier. So we've been talking about how real estate prices change. And a lot of it sounded like a discount rate story. But anyway, how efficient do you think the real estate market is relative to the stock market? The real estate market is a lot less efficient than the stock market. There is no doubt about it. There's a lot of evidence that I can predict where housing prices will be higher than with pretty high probability. I can predict that CDA is going to appreciate faster than CDB.

59:03You cannot predict with any high probability, basically 50-50. If I give you two stocks, which stock are going to do better next year? Stock X or stock Y? You can guess, but you're going to be 50-50 in most cases. On housing, I can probably do that with an 80-20 probability, simply based on momentum and a few other factors. There's a lot of evidence of the housing market is a lot less efficient than the stock. It's just more predictable. What do you think causes it to be less efficient? One of the main things that make it less efficient is the fact that most transactions are being done by non-professionals.

59:40Think about it, who own a home? It's just the average person that owns a home. They're a nurse, they're a doctor, they're an engineer, they're a scientist, teacher, whatever it is, they're not a real estate professional. These are the people that buy and sell homes. They're the ones that are deciding the price of home just by buying and selling them. That's very different than the stock market where the majority on the margin, the price of every stock is being decided by professionals that run cash analysis. And, you know, they predict what's going to be the earning of this company versus the other company in the future, et cetera.

1:00:13And then they're pricing it every single second of the day, just that pure distinction between price determined by professionals, then this is what they do versus price being determined by just the average homeowner make the stock market loss more efficient. In addition to that, I can give you 20 factors, but we don't have time. But I think another big one is the emotional factor that's going into buying. I don't know if you're married, but if you are, you can describe to your wife, for example, and I'm half joking, but that this house is a better deal than this house. It's just a better value.

1:00:50And you can maybe put an Excel spreadsheet and you can show her that you get more money per square foot. And all this is nice and good, except if your spouse feels better in the house that is maybe not as good of a value, then it doesn't matter. It's an emotional connection. It's an emotional decision. Of course, financial too, but the logic is emotional. And sometimes they would pay more or less for a home just because how they feel about it. Not necessarily because it's a good value or less value. I tell my students all the time, you can relatively easy find deals on what I call a piece of property.

1:01:28That's an investment property. And I bought in the past, I bought properties, side and sink. I know the area, I know the broker, whatever. You can buy it based on the cash flows. But on a home, it's a lot more difficult to get a great deal. Something that is all of a sudden really cheap and you happen to love it, more difficult, a lot more difficult. So the emotional part and the fact that it is professional versus non-professional determining prices, those are probably the biggest two factors. Can you give us some examples of those emotional or psychological biases, like specifically ones. And I'm wondering when people are selling their homes, I think there's a tendency to exploit some of those psychological and emotional biases in order to get a higher price.

1:02:11Is that something you can think of examples of? I don't think they're trying to exploit those, but there's definitely a bias of my home is the best. Look how beautiful it is. And I know that the neighbors sold their house for 50 bucks. Hours, of course, is a lot nicer. And really, to them, it is nicer. Because they have maybe memories there, they have connection. It's their choice of whatever the carpet, the wood, the kitchen. To them, it's the best. Many times, I think the job of a good real estate agent is to kind of bring them down. It's like, well, I know you love the home. You have emotional connection.

1:02:46And maybe you raised three kids here and you have good memories, et cetera. But at the end of the day, this kitchen is dated. And this carpet, it's your choice and that's fine. But whoever is going to buy it is going to probably completely replace it. those are actually the kind of things that need to be worked out during transaction. And that's why it's an emotional decision, not just for the buyer and for the seller. I don't know if that was specific enough, but that is definitely a factor that needs to be considered. Sounds like the endowment bias. People value it more just because they own it already.

1:03:15And maybe familiarity bias too, I don't know. So you've said, and Dan and I have said this on this podcast too, most people should probably buy a home or own a home as opposed to renting for all of the behavioral and hedging reasons that we've talked about. but we've also established that renting can come out ahead. We can show in a model that renting should come out ahead more often than not. What are the main decision points that would push you or lead you to push someone else one way or the other between renting and owning? We talked about why you should be buying and there's a lot of reasons for that.

1:03:43On the rent side, I think the people that, again, for them, it's a big stretch to buy a home, meaning that it's too big of a mortgage, the mortgage payment will be too big part of their monthly income. They may not be able to afford a repair or things like that. That's number one. And then probably almost as important is that, especially for young people, those people that are young professionals, they would move around a lot more often than they think they would. So as you're becoming more valuable in the market, it is likely you're going to be moving out from one position to the next. How many times there's a person that just bought a home, they got a promotion, but they but they need to move from Atlanta to Chicago.

1:04:27And they wouldn't take this promotion because they just bought a home. Except that if they rent, they can just cancel the lease. Maybe they pay a small penalty or maybe even their employer will pay that for them. Two months of rent, typically. They would take the promotion, make more money, move them ahead for whatever the next position after that, et cetera. People underestimate how often you move when you're young. And this is especially true for large countries where every move is make it impossible to stay in the old location. So if you think about the United States, right? And if you move from Atlanta to Chicago, you have to, you can't just commute.

1:05:06Even in South Florida, if you're moving from, we got a position from Miami, now you got a position in Blocca with traffic and all that. No, you have to move again. In those cases, if you move a lot, or if you expect to move a lot, even if you don't know it, probably renting make a lot of sense in large countries like the US. I'm originally from Israel. That problem is not there. So Israel is a very small place. And typically, again, you buy your home and the home ownership is very high. And if you move around, then you drive instead of 30 minutes this direction, you just drive 30 minutes the other direction.

1:05:39It's not like you're going to be moving four hours away. There's no four hours away, almost. So yes, you're moving, you're moving one company to the next, so you get promotion, etc. But you can still keep living in the same place. This is not how it is in the United States. So transaction costs in terms of moving, living, and giving up on opportunities because you own a home is very costly. Again, something the motor does not consider, but should be considered. Okay, Eli, we always conclude our interviews with the same question. How do you define success in your own life? I think success in my life or in anybody's life, what I would consider is being able for the majority of the time to do the things that you love doing.

1:06:20There's never 100 % of the time. But if you can wake up in the morning, you know that for the rest of the day, you're going to be doing for the majority of the time the things that you want to do, whether it is work for people you like, work in a field that you enjoy for the majority of the part, spending time in a place that you like with the people that you like or love. That's what makes it successful. Agreed. Part of that, of course, to do what you like is it takes money because when you don't have money, many times you have to do things that you don't like. But if you're passing this hurdle and now you can choose your clients, you can choose your coworkers, you can choose what you're working on.

1:06:55Again, not all the time, but to a large extent, I think you're successful. Great answer. All right. That's it, Eli. This has been a great conversation. We really appreciate you coming on the podcast. Thank you, Ben. Thank you, Dan. I really appreciate it. I enjoyed it very much myself. Thanks.

1:07:19Thank you.