By Erik Brynjolfsson, Quora From Business Insider

“What do economists think about buying vs renting a house?” originally appeared as a question on Quora. Below we are republishing an answer from Erik Brynjolfsson, director of the MIT Initiative on the Digital Economy.

First, the right way to think of your asset portfolio is to include both liabilities and assets.

Unless you plan to be homeless, you have a huge expected lifetime cost for housing. The neutral position is not to own zero housing, but to own the same amount of housing as you expect to consume. If you don’t, you are in effect “shorting” housing and at risk if housing prices go up.

Second, there’s a huge tax benefit to housing which comes from the hidden “dividend” it pays. I’m not talking (just) about the (too) generous mortgage deduction, but rather the fact that you don’t have to pay taxes on the implicit rent you earn on your house since its paid to yourself.

A house generates enormous rental value each month — like a dividend. If you rent it to yourself, you take the money out of one pocket and pay it to the other one, and the IRS doesn’t tax that. In contrast, if you earn money some other way and then use that money to pay rent, you probably also have to pay taxes. That can add up.

Last but not least, owning a house gives you “residual rights of control” to do what you want with it and that kind of ownership creates psychic rewards for many people and it’s also a kind of forced savings that can pay off over the long term. You can paint it, remodel, put in a garden, invest in custom appliances, etc.

Owners also often tend to feel more attached to the community. Most mortgages require you to make a monthly payment and for many people, that ends up being their biggest source of savings. Investing in something that gets better over time is something many humans get a lot of value from, aside from the narrow financial effects.

Erik Brynjolfsson is a professor at the MIT Sloan School and the director of the MIT Initiative on the Digital Economy. His TED talk laid out an optimistic vision for the future of economic growth, which he and Andrew McAfee described further in their best-selling book, “The Second Machine Age.” You can keep up with his research via his website or Twitter: @erikbryn.

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IMAGE: Erik Brynjolfsson gives a TED talk in 2013

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