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1:52

Hello. I'm Kenny Malone, and

1:54

I'm Greg Rizalski. Today, Greg,

1:57

it is time for something that we have

1:59

cleverly named behind

2:01

the newsletter inspired course by VH1s

2:04

behind the music.

2:04

Yeah.

2:05

But with way less drama and way

2:07

more economics learning. Right. So

2:09

every week, I write Planet Money's newsletter,

2:12

I often interview like leading economists

2:14

and policymakers then you get

2:16

to hear some of those interviews here

2:18

as sort of like a perk for your

2:20

subscription. Yeah. And we're gonna

2:22

share an interview with you dear

2:24

listeners that Greg did

2:26

with economist James

2:28

Choi. You wanna set this up for us, Greg? Yeah.

2:30

So James Choi is an economist at

2:32

Yale and and earlier this year he came

2:34

out with this working paper that was published

2:37

at the National Bureau of Economic Research

2:39

and it's called popular

2:41

personal financial advice versus

2:44

the professors. Basically, you looked at

2:46

fifty of the most popular personal

2:48

finance books out there. Books with advice

2:50

on saving for retirement, investing,

2:53

buying a house, all that stuff. And

2:55

you see us how their advice squares

2:58

with more traditional economic

3:00

thinking. Okay. This is good. This is the

3:02

meta study of, like, what,

3:04

these are books that are literally like personal finance for

3:06

dummies, like a meta study of that stuff.

3:08

Exactly. That was one of the fifty books.

3:10

Others you might have heard of like Dave Ramsey's

3:13

total money makeover. Tony

3:15

Robbins money master the game.

3:18

Susie nine steps to financial

3:20

freedom. Books by people, I like

3:22

to call the financial, think

3:25

influencers. Think

3:26

influencers, the Portmanteau of

3:28

thinking and influencing. Is that what that

3:30

is? Yeah. I don't

3:31

know. Whatever. Well, I get let's

3:34

go with Katie. I can go with

3:35

you, like, a podcast, think flu

3:37

winter. Oh, that's great. Thank you. Thank you.

3:40

Okay. So we've got James Choi,

3:42

Economist reading all of these thing

3:44

influencer books. And so he's

3:46

kind of trying to to be a referee, I suppose.

3:48

Right? And and say things like This

3:51

tip, it's in a lot of these books, it makes

3:53

sense from economist's

3:54

perspective. This other one, not so

3:56

much. That that's the game here. Kind of, yeah,

3:58

sometimes he says, yeah, that makes sense

4:01

according to economic theory.

4:03

Sometimes he's like, that doesn't. But sometimes

4:05

he says it depends because the popular

4:07

books he thinks author advice that

4:09

might make a little bit more sense from

4:12

a behavioral economics perspective. So

4:14

choice, we should say, is a behavioral economist,

4:16

meaning he believes that people don't always

4:19

act rationally when it comes to money.

4:21

Whereas more traditional economic theory paints

4:23

humans as kind of these hyperrational, disciplined

4:26

creatures who are always acting in their own

4:28

self interest. And sometimes

4:30

when you're talking about financial advice,

4:33

it breaks along those

4:34

lines. Are people fundamentally rational

4:36

about money or are they not?

4:39

And so with that further ado,

4:41

here is Yale economist's

4:44

Joy zooming with with Greg

4:46

And of course, you can read more about all

4:48

of this in Greg's newsletter at

4:51

the link in our episode notes.

4:55

Before we kinda get into, like, the nuts

4:57

and bolts of it, like, why don't we just start with,

4:59

like, the backstory? Like, what inspired you

5:01

to to do this

5:01

research? A few years ago, I

5:04

started teaching a personal finance

5:06

course. And in putting the

5:08

course together, I was looking for some

5:10

texts to assign to the class. And

5:12

that caused me to look at some of these

5:15

popular personal finance

5:17

books. And as I was reading a

5:19

few of these books, it struck me

5:21

that these people were giving some advice

5:23

that was maybe quite different from

5:26

how economist's think about

5:28

this and it really

5:30

was kinda inspired by

5:32

my teaching. So if I have this right,

5:34

you you read through fifty of

5:36

these popular books about personal finance,

5:38

I will confess that I did not read every single word.

5:43

I had some excellent research assistance

5:45

due to the groundwork Okay.

5:47

I did end up skimming every

5:49

single page of all these

5:51

books, at least skimming, and then

5:53

reading closely some of the fact that So,

5:55

you know, let's go through some of

5:57

your big findings. So let's let's just

5:59

talk about advice regarding saving.

6:01

Like, how does traditional differ

6:03

from from what popular authors

6:06

prescribe when it comes

6:07

to, you know, how we should spend, borrow, and save

6:09

over the course of our lifetimes. Traditional

6:12

starts from the perspective that

6:14

we want to optimize your consumption

6:17

path over time. Given

6:19

the uncertain amount of resources in your life,

6:21

what traditional says that you want

6:23

to smooth that consumption over

6:25

time because the hundredth bite of

6:27

ice cream is less

6:29

pleasurable than the nine ninth byte, which is less

6:31

pleasurable than the ninety eight byte and so on and so

6:33

forth. And so what life cycle

6:35

hypothesis Theory

6:38

says is that you should

6:40

have zero negative or

6:42

or at least very low savings rates when

6:44

you're young. And then in

6:46

mid life, you should be a super saver. You

6:48

should really be saving

6:50

a lot of money because that's when your life

6:52

look when your earnings are especially

6:54

high. And then when you are in your

6:56

60s, 70s and beyond, you should have a

6:58

negative savings rate because at that

7:00

point, you have a relatively low

7:02

income. Mhmm. And

7:04

and so and and to convert that into,

7:06

like, something, it's, like, for example, like,

7:09

one advice for that could be, like,

7:11

you know, let's say, you're, like, going

7:13

to a good school, you expect to get a good

7:15

career, it might make sense

7:17

actually to, like, go ahead,

7:19

go out to dinner, accumulate some

7:21

debt, and that might

7:23

be like, okay, because you're basically

7:25

borrowing from your future self who's gonna

7:27

be much richer, and so

7:30

enjoy a little

7:30

bit. You know, like, maybe don't screwed

7:33

as much. Absolutely. I I tell my

7:35

NBA students that you of all people

7:37

should feel the least amount of guilt of

7:39

having credit card that because your income

7:41

is fairly low right now, but it will very

7:43

predictably be fairly high in the

7:45

very near future. So it's

7:47

okay if you, you know, rock up some credit

7:49

card debt right now, but you probably want to

7:51

be pretty expeditious in

7:53

paying it off once you have a job full time.

7:55

So

7:55

what does the popular advice

7:58

say with these fifty books?

8:00

Popular authors tend to advise you to

8:02

smooth your savings rates rather than

8:04

smooth your consumption. Say that you should

8:06

be saving a consistent percentage

8:08

of your income kind of throughout

8:10

your life. So even

8:12

in your twenties, when your income is

8:14

low, they you should be saving kind of fifteen

8:16

percent of that to

8:18

establish a discipline of saving

8:21

and they're also very big on the power of

8:23

compound interest. So they say if

8:25

you start saving in your twenties, then

8:28

that's gonna grow to x millions

8:30

of dollars once you retire. So

8:32

important to get a head start. Mhmm. The

8:35

models take that into account and but

8:37

even after taking that into account, the

8:39

economic models and say, well, your

8:41

savings rate might opt in with me zero or

8:43

negative when you're young because

8:45

it's just so valuable for you to be able to

8:47

consume at a reasonably high level when

8:49

you're young. Whereas the

8:51

popular authors generally say

8:53

compound interest mean that you should be saving a

8:55

positive amount at all

8:56

times. mean, this is how I think. Like, so

8:59

for example, like, I'm a mountain

9:01

biker. And my body

9:03

is, like, younger now. Know, like, not

9:05

so young, but, like, I can mountain bike

9:07

now and I'm not gonna be able to mountain

9:09

bike as hardcore when I'm in my

9:11

fifties, sixties, or seventies. So

9:13

should probably spend and buy my mountain

9:15

bike now and enjoy it. What's so

9:17

it seems like, from my read of how

9:19

you've answered this in your advice to the NBA

9:21

students, It seems like point one for

9:23

the traditional economic

9:24

school. Am I am I wrong? I'm

9:27

actually agnostic about it. I mean, it's

9:29

absolutely true that that in

9:31

speed it till Margaritally diminishes.

9:33

So -- Mhmm. -- the value of an extra

9:36

dollar of spending is

9:38

pretty high when you're spending a low

9:40

amount and not so high when you're spending a

9:42

lot. In other words, you get more bit more

9:44

bang for your buck, more pleasure for your

9:47

buck at this at these low levels

9:49

and maybe

9:50

increasing your spending a little bit in your

9:52

twenties actually is gonna boost your lifetime

9:55

total happiness. Yeah.

9:57

That being said, I do think that there is something

9:59

to this notion of being

10:02

disciplined and and learning to

10:04

live beneath their means in in that mentality.

10:06

And in this whole theory

10:08

from Aristotle that you build

10:10

virtues by acting in a certain

10:12

way and you change a character by

10:14

acting in a certain way, certainly,

10:17

as I look at my own life, when I

10:19

was a PhD student that had a very low

10:21

income, I didn't take on debt. In

10:23

fact, I saved a little bit of money

10:25

over my PHT years. And it didn't

10:27

feel like it was a deprivation

10:30

because I I was low income.

10:32

Everybody I hung out with was low income.

10:34

Your students and it was fine. Mhmm.

10:36

And for me, personally, the jury

10:39

is out on duties that the light

10:41

really looks like. Okay.

10:43

Let's talk about mental accounting.

10:45

What is it? What does traditional

10:48

say about

10:48

it? And how does the popular

10:51

literature differ? Mental counting is

10:53

the practice of breaking

10:55

up your wealth into

10:57

different little buckets. And

10:59

saying, this money is the money for the

11:01

gasoline. This money is the money for the

11:03

down payment. This money is the

11:05

money for the Hawaii vacation. And

11:08

at least some more extreme

11:10

version of the mental counting, you cannot

11:12

use the money that you're saving for your

11:14

Hawaii vacation to save

11:16

up to the down payment and to apply it to

11:18

the down payment. And so these rigid buckets

11:21

can have a substantial effect

11:23

upon the path and the positioned under

11:25

spending. Mhmm. Actually, I'm thinking it

11:27

would say that a dollar is a dollar is a

11:29

dollar. And so it just doesn't make

11:31

sense to have these rigid boundaries

11:33

within your wealth portfolio

11:35

that are kind of

11:38

separating money that is used for one

11:40

purpose versus the

11:40

other. And there has been some empirical

11:43

work on So I I know Richard Taylor has

11:45

done things. And is my

11:47

right to think that the economic evidence

11:49

or the modern empirical

11:50

evidence, I should say, suggests rental accounting

11:52

is actually like an effective thing. I

11:54

don't know if it's an effective thing. I think that

11:57

there is evidence that people engage

11:59

in it. But I do

12:01

think that there is some

12:03

value in metal copying because it

12:05

just makes a whole bunch of

12:07

financial calculations easier. I

12:09

want to go to Hawaii, and so I

12:11

want to make sure that I have enough money

12:13

to pay for that trip, or

12:15

I'm going to get married next year.

12:17

It is really valuable for me

12:19

to use money next

12:21

year because, hopefully, a wedding is

12:23

something that only happens once in your life.

12:25

And so y'all kinda wanna blow out party.

12:27

And, yeah,

12:29

it it just helps me to

12:32

know how much I need to save today in order

12:34

to have that blowout party next year.

12:37

Economists are not very good

12:39

about modeling

12:43

those types of occasions

12:45

where spending money is

12:47

especially valuable. So the wedding

12:49

being single in your twenties in

12:51

Manhattan occasions

12:54

where kind of the value of an

12:56

extra dollar spent is especially

12:58

high. And so

13:00

that's where you get back to this

13:02

consumption or expenditure smoothing where

13:04

act on theory to say, well, you kinda want to

13:06

stand about the same amount of money every

13:09

year. But, hey, like,

13:11

actually in the year that I get married,

13:13

it is optimal for me to be spending a

13:15

lot more than in the year to four

13:17

and the year after. That I got married.

13:19

And so mental accounting can actually

13:21

help people calculate

13:23

how much money do I actually need to be saving

13:25

and spending in those

13:27

adjacent

13:27

years. So if I'm reading your tone and what

13:30

you're saying here, it seems like and

13:32

and not all popular book do this. I

13:34

think you find there's something like thirteen books or

13:36

something that recommend this. So

13:38

it seems like a point potentially

13:41

towards the the

13:43

popular literature

13:44

here, at least the versus

13:46

traditional I

13:48

think so. Yes.

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15:14

nights. So

15:17

next up is something actually I have

15:19

actually never heard of this phrase. Let's

15:21

talk about something you called wealthy

15:23

hand to

15:24

mouth. What what does that mean? And how does

15:26

the advice differ here? Wealthy hand

15:28

to mouth is something that is a

15:30

term that economists made up

15:32

ordinary people would call it something like

15:34

house rich, cash

15:36

poor. So you have an enormous

15:38

house you're really, really stretching to

15:40

pay the mortgage and their checking

15:42

account balances hovering around zero at

15:44

the end of the pay cycle. So

15:46

a lot of American

15:49

households are wealthy hand to mouth

15:51

or House Switch Cash Tour.

15:53

And the question is,

15:55

why? It turns out that you

15:57

can rationalize this behavior. It

15:59

can be justifiable. If

16:01

the financial returns

16:03

to owning this illiquid asset

16:05

like a house is extremely

16:08

high. And so then it's worth it

16:10

to really put as much money into this housing

16:12

investment as you can even though it

16:14

causes a lot of bumps in your life

16:17

outside of the house because

16:19

you're constantly running out of

16:21

money in your checking account. So

16:23

what I was looking for in

16:26

the popular books is

16:28

see. Do these popular authors

16:30

say that the financial

16:32

returns to owning a house are so

16:34

fantastic that you

16:36

shouldn't maybe the House Switch,

16:38

CashCore. And basically,

16:40

I found a

16:41

no. None of the popular authors

16:43

recommend that you should

16:45

be house rich cash poor.

16:47

In other words, like, you shouldn't

16:49

buy a house that you can't really

16:52

afford

16:52

without, like, some buffer.

16:55

Yeah. So if you end up owning a

16:57

house in that home

16:59

ownership and the down payment and the mortgage

17:00

payments, make it so that you

17:03

don't have any kind of emergency savings

17:06

buffer, then that's probably a mistake that

17:08

you're making. And and there seems to be

17:10

agreement between both traditional

17:12

economics and the popular

17:13

advice, which is like don't buy more house than

17:15

you can afford. I guess there's a little bit

17:17

of a a debate going on in in traditional

17:20

economics. As to whether this is a mistake

17:22

or not. Older, really

17:24

traditional economics would

17:26

say that this is a mistake. Kind

17:28

of the newer traditional economics would say,

17:30

well, there might be good reason for people to

17:32

do this because financial returns to

17:34

owning a house to owning these

17:37

illiquid assets is really

17:38

high, so it makes it worthwhile. And

17:40

there's kind of this middle crowd

17:42

that says, well, maybe it's not a

17:45

mistake because there's fantastic returns that people are getting

17:47

off their houses. Okay.

17:50

Let's go into the next one.

17:52

So This is something I always hear

17:54

about asset allocation. I think it's something that

17:56

really matters to people. And I think there's a

17:58

common I don't know if this comes from the popular

18:00

books, but there's a common one

18:02

which is take hundred,

18:05

take your age, minus it, that's the

18:07

percentage you should be in

18:10

stocks. And so as you get older, you're

18:12

getting less and less in stocks.

18:14

But like, what what does say about

18:17

this? Yeah, unpack this for us. How do these

18:19

different schools of thought think about where we

18:21

should be putting our money? I think

18:22

qualitatively, the popular device

18:25

and the economic eatery end up

18:27

in similar places, but for

18:30

fairly different reasons. The

18:33

popular belief is

18:35

that the stock market is kind

18:37

of guaranteed to go up, but if

18:39

you just hold on to it for long

18:42

enough. Now, this is just not true, and

18:44

you can see it in

18:46

Japan or Italy.

18:48

In Japan, not the b

18:51

k still has not recovered to the level

18:53

it was in nineteen eighty nine.

18:55

Mhmm. So it is not true that stocks are

18:57

always going to win over the long run, bad

18:59

things can happen. Now

19:01

it happens to be true that historically

19:03

the US stock market had a

19:05

Fed past century. So the

19:08

US stock market, we've gone

19:10

lucky and we have done very well, but there's

19:12

no guarantee that the US stock

19:14

market couldn't have a

19:16

lost decade or even a

19:18

lost fifty

19:18

years. We just don't know. And so

19:21

there are risks to

19:23

investing in stock market. They're very real

19:25

even if you have a very long holding

19:27

period. That's interesting. I feel like

19:29

Duck's conventional wisdom. I feel

19:31

like you just said something that

19:33

I even ascribe, like,

19:35

two that, like, you know, you look at over

19:37

the long run, the S and P five

19:39

hundred in real terms goes up seven

19:41

percent every year. For, like, as long

19:43

as the S and P, you know, has been a

19:45

thing. And you're saying that, like, you

19:47

know, Pat like, that might actually not

19:49

happen. And I didn't realize this about

19:51

Japan. But that well, maybe somebody

19:53

would counter and

19:53

say, well, eighty nine is not that long ago.

19:55

That's not the long term. That

19:58

that is thirty years.

20:00

Not too many thirty year chunks

20:02

of time in the lifespan.

20:03

Yeah. That's true. Well, okay. So

20:06

so continue because that was very

20:08

interesting. Yeah. So

20:08

the the the reason that

20:11

these popular authors recommend

20:15

these stock allocations that decrease with

20:17

age is they're really thinking about the

20:19

investment horizon. And they think the you

20:21

invest in the stock market, the safer it

20:23

is. And so when

20:25

you're young, you have a long time until

20:28

we talk So the stock market is relatively safe. As you

20:30

get older, the stock

20:32

market becomes less

20:34

safe because your investment pricing gets

20:36

shorter and so you should be cutting back

20:38

on stock. Howard Bauchner: Now, Equinor

20:40

theory would say, yeah, there's something

20:42

to that. But what

20:44

is it more robust?

20:47

Reason to become more

20:49

conservative in your financial portfolio past

20:51

allocation over time is

20:53

that when you're young, you

20:55

have a lot of wage payments

20:58

still left in the future. And

21:00

these are relatively safe compared

21:02

to the stock market. That means

21:04

that you can take a lot of risks with

21:06

your financial portfolio because you

21:08

have this huge backup asset,

21:11

which is your future wage

21:13

income. And if you have

21:15

a really bad run-in your financial portfolio,

21:17

you can work for a

21:19

bit longer to take a side hustle. They're

21:22

sorts of ways in which your future

21:24

labor capacity provides a

21:27

cushion for the risks

21:29

that you're taking a financial

21:30

portfolio. But when you're older, you just don't have as

21:33

much of that labor capacity left

21:35

in the future. And so you

21:37

need to dial back the

21:39

risk in your financial portfolio because you

21:41

just don't have that same

21:44

backup from your future wage income.

21:47

Fascinating. Okay. Another complicated thing

21:49

I'm hoping you could explain, like,

21:51

investing in the world market. So

21:53

there there's this

21:56

weird thing that happens, I guess, in quarterly

21:58

economic theory, doesn't make sense to

22:00

invest in your home market disproportionately.

22:02

But peep can you explain what that

22:04

is? And and and and how

22:07

we should think about that. So there's

22:09

a big global economy out

22:10

there. And there's

22:13

risks that are hitting every single country.

22:15

So economic theory would say you want a

22:17

diversified portfolio that

22:20

holds a bit of every country

22:22

in the world. Stock

22:25

of every country in the world. And in

22:27

fact, you want to hold stocks

22:29

in proportion to how much of

22:31

the world market cap is

22:34

embodied in each country's stock market. What

22:36

that means is that really you should be

22:38

only only about forty percent of

22:41

your stock portfolio in US

22:43

stocks and the remaining sixty percent

22:45

should be invested in international

22:48

stocks. Now what

22:50

we observe in every country in the world

22:52

is that people like to hold disproportionately

22:55

the stocks of their own country.

22:58

And so this is a phenomenon

23:00

called home bias and their debates

23:02

about why home bias arises.

23:05

But the striking thing about the popular authors

23:07

is that they all

23:10

recommend homebuyers

23:10

portfolios. Very few of them say you shouldn't hold

23:13

any international stocks, but

23:15

they all recommend that you hold

23:17

much fewer than sixty percent of

23:19

your stock portfolio in international

23:21

stocks, which is quite interesting. That

23:23

is interesting. I mean, is there any impurities I

23:26

mean, I can imagine somebody saying,

23:28

like, the United States, for example, has a really

23:30

sophisticated market, and everybody

23:32

wants the list in the S and

23:34

P five hundred. It's a more diversified

23:37

market. There's the the

23:39

technology companies are all here. The the

23:41

future is technology. So

23:43

it makes sense to put more

23:45

money you're an

23:46

American, it makes more sense about maybe

23:48

home bias is because of that. Well,

23:50

so first of all, people in France

23:53

invest disproportionately in the French market.

23:55

People in England invest disproportionately

23:57

in the in the UK market. And

24:00

so, you know, everybody can't be

24:02

right. It just seems to be a little

24:04

bit of jingoism. Where

24:06

people just like their stocks

24:08

that are familiar. Mhmm.

24:11

Now in terms of be

24:13

attracting this as the US market itself. It's

24:15

true that the US is the

24:17

dominant stock market in the world. But

24:19

just because it has all

24:22

advantages doesn't necessarily mean

24:24

that return are going to be higher going

24:27

forward. It can mean that prices today

24:29

are higher But if

24:31

anything, higher prices today mean lower

24:33

returns going forward because a lot

24:35

of those advantages have been

24:37

priced in. Now

24:39

it is true that the

24:41

US stock market has had a fantastic

24:44

century. The the US stock market

24:46

has done actually, better than

24:48

that. There's been some bugs. Yeah. It seems

24:50

impossible to oh, but over over

24:52

the last few decades in Uruguay, I

24:54

think the US stock market has

24:57

outperformed most stock markets

24:59

in the world. If not all,

25:01

I have try not all. But

25:03

certainly, it has been a very strong

25:05

performer. And so if

25:07

you were simply looking at

25:09

history and were to

25:11

extrapolate that history out and you might say,

25:13

yeah, a hundred percent allocation to the

25:15

US stock market is the way to

25:17

Going

25:17

forward. That's assuming that history is going

25:20

to repeat. What's the what's the phrase

25:22

past performance is no guarantee of future

25:24

results, something like

25:24

that? Yeah. So we we don't know US

25:27

is going to have another great century. And

25:29

so economist's should hedge

25:31

your bets and diversify across

25:34

countries rather than just going with the winner.

25:37

From the past.

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26:14

Bauchner: So, I I guess, we're almost

26:17

done here. I I kinda wanna just open up the

26:19

floor because I haven't covered everything that

26:21

we bring you think there's, like, anything that

26:23

we haven't covered that, you know,

26:25

really jumps out at you as, like,

26:27

this chasm between two

26:29

different sides of this and and

26:31

that you think is worth commenting

26:32

on. But one big thing that we

26:35

haven't talked about yet is adjustable

26:37

rate versus big straight mortgages.

26:38

The popular authors are quite

26:41

unanimous in recommending fixed rate

26:43

mortgages. These are safe, they're

26:45

reliable, whereas

26:48

benchmark economic model would say that actually

26:50

adjustable rate mortgage through the kind of awesome

26:52

because they

26:54

tend to have payments that

26:57

decrease in economic recessions because

26:59

they are pegged to this

27:01

interest rate that tends

27:03

to go down in recessions. So you're intending

27:05

to get a payment relief at exactly

27:07

the macroeconomic moments. You want

27:09

the payment relief to to come to you.

27:12

Fixed rate mortgages are not actually

27:14

risk free. We think that them as risk

27:16

free because the nominal amount of

27:19

the payment is fixed over

27:21

time. As soon as they say that the

27:23

nominal amount is fixed over time, you realize,

27:25

hey, there's inflation working

27:27

in the background. And if inflation

27:29

is really high, That means that you're getting a

27:31

good deal as a fixed rate

27:34

borrower. That means that if inflation

27:37

is fairly low. I mean, you're actually

27:39

taking on a bigger death

27:41

burden than you would have if

27:43

inflation were pretty high. So,

27:46

actually, fixed rate mortgages have their

27:48

own risks. And because

27:51

fixed rate mortgages have two

27:53

features, one is that the duration

27:56

in which you're locking in the interest

27:58

rate is longer

28:01

than for fixed rate mortgage or for

28:03

adjustable rate mortgage, where that

28:05

interest rate is adjusting all the

28:07

time. Usually, when you

28:09

need to lock in an interest rate for a

28:11

longer period of time, the interest rate is gonna

28:13

be higher. Now adjustable rate mortgages have their

28:15

own disadvantages. So

28:17

it's true that the size

28:19

of the payment does fluctuate. And so

28:21

in the short term, you do face some

28:24

risk when it comes to adjustable rate

28:26

mortgage. And so if you're really

28:28

stretching to buy the

28:30

house. If you're really stretching to

28:32

make mortgage payments, then actually

28:34

a fixed rate mortgage is probably better

28:36

than adjustable rate mortgage. But if you're leaving

28:38

yourself a buffer, what the economic model say

28:40

is that net net net when you add up

28:42

all the

28:43

factors, most people shouldn't be getting an

28:45

adjustable rate mortgage. That's

28:48

interesting. Yeah. I mean, like, for,

28:50

like, a moment right now, like, where people

28:52

are worried about inflation, the

28:55

mortgage rates are are

28:57

have kinda gone up quite a bit over

28:59

the last year. It seems like

29:01

a particular moment right now

29:03

where, like, maybe

29:05

a adjustable rate mortgage. Adjustable rate

29:07

mortgage might actually make more sense. And but

29:09

you're saying, like, always, it

29:11

makes more sense

29:12

potentially, if you have a buffer. I mean, the the the

29:14

one exception is when fixed

29:16

rate interest rates are very

29:18

low. Yeah. And so actually,

29:22

when fixed rate mortgage, interest

29:24

rate was quite low recently,

29:26

the economic model say that you

29:28

might prefer the fixed rate mortgage by just

29:30

a little

29:31

bit. Hopefully, that's forty days, but

29:33

it's really close. Mhmm. But in

29:35

kind of typical economic conditions,

29:38

you're gonna kinda you're gonna want adjustable

29:41

rate

29:41

mortgage. I'm interested in this one

29:44

because I'm actually thinking about buying a

29:46

house right now. So I'm,

29:47

like, so interested in this one. I was just assuming

29:49

that thirty a year was was better. But, like, now

29:51

I'm, like

29:53

Yeah. Well, let's

29:54

say if you're trying to pursue my

29:56

perspective, there is this probably

29:59

irrational kind of fear that,

30:01

like, in, like, kind of a distressed financial

30:04

institutions where, like, oh, they could

30:06

just jack up this interest rate at any moment. And so

30:08

there's utility to

30:11

having predictable, like, a

30:13

predictable

30:14

and not be subject to

30:16

shocks. I think there is this real psychological

30:18

angle there. The

30:20

difference between a fixed rate mortgage

30:22

and full rate mortgage is for

30:24

the fixed rate mortgage, the risks

30:26

manifest themselves over a long period of time.

30:28

So if there's constantly higher

30:31

inflation over the life of the mornings and you're gonna be

30:33

well. If it's not so high, you're gonna be

30:35

poorly. But in the short run,

30:37

the payments are fairly fixed. Yeah. For the adjustable rate

30:39

mortgage, the overall

30:41

real value of the repayments is

30:43

almost completely inside zip to inflation.

30:47

So your long run liability is actually

30:49

fairly safe. But in the short run, you get

30:51

these payment chunks where, oh my gosh, like, I need to

30:53

send in a bigger check every month. And

30:57

my paycheck hasn't adjusted yet to reflect inflation

30:59

and yet the size of

31:01

my monthly payment has already

31:04

adjusted. So it's kind of this this

31:06

very salient kind of shock versus

31:08

one that creeps up on you over

31:10

time, which is, you know, the second is what you're

31:13

facing with the fixed rate mortgage. If

31:15

you own a home, I'm curious what you have. And you

31:17

don't have I'm a

31:18

wrecker for life. I don't

31:20

know. Yeah. Okay. No. He's happy

31:23

bothered.

31:23

Well well, and what we did to that, you do not believe in

31:25

the long run returns on the

31:27

house? I I don't think that on average, there

31:29

are huge financial differences.

31:32

Between owning versus renting

31:34

at home. And

31:36

I don't get much psychological pleasure

31:38

out of the notion of owning my

31:41

homestead or be able to customize where I

31:43

live to my heart's content. Actually, those

31:45

that latter thing just gives me

31:47

a headache. And so I can't be bothered, and

31:49

so I rent an really convenient

31:51

and it's that I don't think there's a big

31:53

financial loss to it. I tell people, if

31:55

the type of place you want to live in,

31:57

is only available to buy. You should

32:00

buy. And if

32:02

you are happy, living

32:04

in a place where you can

32:06

rent it and you're you

32:08

don't have this big psychological boost from

32:10

owning your home

32:11

stand, then you should be able to liberated

32:13

to rent. So I'm pretty aware that's fair about it.

32:15

Yeah. I've heard that, you know, one of the

32:17

piece of advice I've heard is, like, if you live in

32:19

an area where there is a

32:21

lot of housing appreciation, it

32:24

might make sense to buy because

32:26

you're locking in and you're

32:28

not

32:28

as, you know, subject to the whims

32:30

of of landlords.

32:32

Like, if you're

32:32

gonna lose it, this is a this is a complicated question,

32:35

and I don't think that neuroscience has a great

32:37

handle on it. This is kind

32:39

of question

32:41

of does owning the home

32:43

provide you insurance against

32:45

rental price fluctuations, that's

32:48

complicated. It does provide you that sort of insurance, but

32:50

you're exposed to other kinds of risks like

32:52

your neighborhood might go to pot and

32:54

your home value falls by

32:56

twenty percent. You know, that that's a

32:58

pretty big hit to your network. Mhmm.

33:00

There's also a a lot of risk

33:02

that you are exposed

33:05

to at the transaction date.

33:07

The the date that you buy the home,

33:09

the date that you sell the home, there's

33:11

a huge amount of risk that

33:13

kind of realizes itself on

33:16

those dates? Because it depends upon are

33:18

you going to match with a

33:20

sympathetic buyer, a sympathetic seller

33:23

And so there's just a a lot of that kind of idiosyncratic

33:26

undiversified risk on those transaction debates

33:28

to expose to homeownership.

33:32

Well, thank you very much. This has been,

33:35

I took a lot of your time, and I

33:37

sincerely appreciate it. Now you're giving me more

33:39

anxiety about buying home.

33:40

So

33:40

thank you.

33:41

That's why I don't buy a home.

33:47

That was James Choi, an economist at Yale. If

33:49

you wanna read more about his study, check out

33:52

the Planet Money newsletter, and subscribe

33:54

to that newsletter. If you haven't already, the

33:56

link is in our episode notes or you

33:58

can just Google Planet Money newsletter.

34:01

Today's episode was

34:03

produced by Brent Bachman and

34:05

edited by Jess Jang. I'm

34:07

Greg

34:07

Rizalski. This is NPR. Thanks

34:10

for listening.