Should One Buy or Rent

Another post on the subject, because of another weird article. The post is this one which actually does a good job of countering out some of the issues in the cited article, which is another "renting-is-the-best-financial-option" article. The biggest point the post made was the the savings of renters are very likely to end up spent rather than invested, which is a very legitimate point, though it doesn't counter the math. There are some quick comments that do counter the math, however, that I think need expounding.

First: long term buyers, which--for all the noise about flippers and trading up and moving--are traditional buyers and are still (probably) the most common buyers--have much different math to look at than those who move every 8 years. The shorter the term someone looks at the more likely that buying is a bad idea, this is true even in cases/places where the monthly mortgage + interest + taxes payment is less than or equal to the rent thanks to closing costs.

Second: it is virtually impossible to get accurate equivalent rent information in an aggregate manner. Controlling for number of bed/bathrooms or square footage or style is helpful, but rarely a really good substitute. The best is to compare same house or side by side...say rental vs purchased condos in the same building/development. To the extent that such information is available, you can get a really good comparison, but that information is so limited that it can't be effectively used for broad comparisons. I know what my house purchase price was, but I only have a vague idea what it would cost to rent it. I can try and figure an equivalent rent from other places, but there is no way to effectively get at the equivalence. Specific amenities, location, and style/preference all factor in. On top of that, many people place extra value on having freedom to make changes/improvements which is rarely a possibility in a rental.

If this sounds like my trying to rationalize my purchase of a house, it is, but that is because these are rational points that were part of my purchase of a house. If 10 years down the road I sell and move for some reason, and the "investment" I made turns out to have not paid off as well as had I rented for 30% less per month today, then that'll be that. But the "investment" plan of purchasing my house was to someday own it outright and have a house that I could live in rent free. I hope that if it ever does come to pass that I need to move that I will be able to keep the house and rent it out to others in the meantime so that it will still be there as a place to retire to.

While there are certainly things that are beyond the control of an individual buyer, whether investing in a house pays off compared to renting has a lot more to do with the intents and actions of the individual buyers than it does the market as a whole.

The Paradox That Isn't

Ezra does some nice policy work but this post on the paradox of presidential leadership is wrong on its face and completely ignores the obvious conclusion.

That a president taking a position polarizes that position making it not likely to pass (without lots of compromising away from it) is completely sensible. So too is it completely sensible that the power of persuasion is greater for the president than it is for pretty much anyone else. These are not in conflict. In fact they point to what should be the most obvious conclusion, and one that many people have complained that Obama really doesn't seem to get: the president should argue and persuade strongly, not for a compromise position, but for a position that is furthest away from his/her opposition as possible.

When Obama was trying to get health care done he should have been selling the American public hard on single payer, medicare for everyone, not exchanges and public options. That pulls the debate back to the center and compromise becomes easier for both parties. As it was, he staked out his position as the one between single payer and being rich and so made the conservative/Republican heath care plan that we ended up with seem like a liberal/Democratic plan to the majority of the American public.

The same was true of the stimulus, the same was true with the budget, the same is true now with the debt limit/deficit reduction debacle.

If Obama had staked his position out as an actual Democratic, liberal position, then it would not be nearly as hard for a compromise bill to get through. Democrats could say they still got some extra revenue from the wealthy, Republicans could say that they saved tax cuts for the middle class and cut government spending drastically. Voters would see Obama presiding over a compromise, and his base (the people he NEEDS to turn out if he wants to win reelection) would see him fighting for strong Democratic principles. (Incedentally, the GOP base would see them fighting as well...it really would be win-win, but it requires the president to stake his position as a liberal one, not as the compromise he truly seems to seek.)

If, in that scenario, the GOP still refused to grant anything, then the perception of them as intransigent and destructive to the country would be even stronger.

Follow up...

to the "If I Made $250k" post. A couple points that I wanted conveyed but didn't actually state:

Dividing that income by 2 does not mean everything takes twice as long. It takes much longer. The reason is that all annual expenses and fun doesn't get reduced by changing that number. Take home drops from $168k to ~$90k. The after tax, after living expenses take home plummets from $127k to $50k and the after fun number drops from $108k to $30k. Now, that is still a lot of extra money, but even with $0 contribution to savings/charity/misc it takes 15 months to pay off student loans rather than the less-than-half a year from before.

But even though savings and debt elimination take much longer, actual standard of living changed by zero. All of the extra money went to future ease, but the life I outlined at $250k looks pretty much exactly like the life I have now (with a few extra perks) despite a much lower income. I realize that some people would take the extra money and buy a bigger house or more extravagant car, but why?

As one makes more money the benefits follow: first, (for some) debt relief, second are various living standard increases, third is leisure increasing, and finally excess/luxury. Well below $250k/year only the last aspect actually changes with added income (and paying off existing debt faster is an excess...it's basically money you don't have something better to do with).

Why Taxes? Science and Education.

For all the complaining I do about finance and taxes and government the reason boils down to science and education. I think that education in general and science in particular are the most important things that government doesn't seem to have trouble cutting. At the state level it makes some sense that they cut education heavily when bad times hit: education is frequently the largest thing in a state's budget. The problem is federal.

We have massive entitlement programs (which I support) and an enormous military (which I think is way too pricey). Everything else is small by comparison, and yet every time that spending cuts are brought down it falls on everything else (which is actually non-defense discretionary spending). The result is that everything else actually has very little in the way of waste compared to the big ones that never get touched, which means that any cutting there really hurts.

If I Made $250k...

Playing the "If I won the lottery" game is always an interesting exercise. I find that I can make use of about the first $1-2 million (lump sum) but that things get fuzzy beyond that and any money past $10 million is pretty much useless (even for investment) other than just giving it away. Altering the game to "If I made $250k/yr" is surprisingly similar...

Based on current tax law (federal, state, and local) and last year's deductions (most of which I would still be eligible for) my take home would be right around $170k, or $14,167/month. Let's make it $14k/mo and $168k/yr.

First off, are living expenses...
House - $1750/mo, $21k/yr
Utilities - $450/mo, $5400/yr (cell, tv, web, gas, electric & water)
Food - $600/mo, $7200/yr (groceries, restaurants, takeout)
Car - $2500/yr (gas, maintenance, insurance, registration)
Debt - $350/mo, $4200/yr (a bit over minimum payment)

Utilities are maybe a bit high, but not much. Food is certainly high (too many restaurants), but car is low (own outright) so that kind of cancels. That totals a bit over $40k/year or $3358/month, leaving nearly $10,640/month or $127,700/year. Time for fun...

Travel - $5000/yr
Other - $15k/yr (home improvement, clothes, entertainment, presents)

This is pretty nice living. Most of the country can't afford $5k in vacation travel per year and $15k on stuff. But even with that This still leaves nearly $108k ($9k/month), after taxes, left to spend/save. After paying taxes, covering living expenses and having plenty of fun I am left with a fair bit more than I make before taxes currently. I know pretty well what I would do with it: my student loan debt (currently ~$40k) would be gone in roughly 6 months (eliminating its inclusion above). The bulk of the rest--say $50k--would, in year 1 go to savings (house interest is low, and tax deductible) and charity. The remaining $18k I would use for various extras that I presently can't afford...hard to say exactly what, but probably some home rennovation work, some new furniture, a motorcycle, a road bicycle. Certainly it would also include some more for presents and others, but exactly how that would all get distributed is not so exact as the student loans.

But the inexactness of what to do with that money is kind of the point. After taxes, with all my living expenses covered and with lots of fun covered, and even with my student loans paid off and a large portion used for savings/charity, there is still $18k left over...in only 1 year of earning $250k.

If I were brining in this income I would own my house outright in ~5 years (just figure that $40k from the student loans going toward the house instead in years 2-5). I would be able to bank $0.5M within 10 years (at least $30k/year yrs 1-5, then $70k/yr for 6-10), which with investments and other savings/401k be around $1M in under 15 years.

This is a budget that Obama has promised not to raise taxes on (it is not over $250k/year, and deductions would bring it below even that). This is a budget that Republicans insist raising taxes on would be hurtful to the economy, a budget in which at least $70k is socked away and pretty much useless to the economy anyway.

Another Article on How $250k/Year Isn't Much

Articles like this one are beyond frustrating. Fortunately most of the commentors seem to be reasonable, but how the hell did that crap manage to get through and published? And why can't this writer and people who sympathize extrapolate back to figuring how a family of 4 making $50k/year gets by?

...Oh, and that family wouldn't see their taxes go up by a dime under Obama (which I think is the truly irresponsible thing).

Frustrating...More so if True

I understand why [feminists] get a bit bristly about shit like this. Sexual assault and rape are pretty damned big problems. Unfortunately, many trials come down to "he said - she said" arguments with little in the way of physical evidence (that can't be discounted by that argument). This means that the credibility of the parties becomes very important. Coupling this with a historical notion that erring on the side of caution means not sending a person to jail that is only "probably" guilty, means that it is very difficult to successfully prosecute even credible accusations of sexual assault.

Reading through the reader comments, however, is depressing. There is a very obvious bias that can be boiled down to a "sluts can't get raped" mentality that makes it remarkably easy for people in power, and people with wealth to abuse those who are without. It would be a shame if she was really peddling false accusations for some profit, because by and large accusers have more to lose and less to gain by their accusations than perpetrators of rape and assault do by their actions.

Eating Dogs

First: barring some dire need I don't see a reason to. That said, it's very odd to see how worked up people get (article: meh, comments: an insight into souls) about one kind of diet or other. It would be different if the people who are so strongly opposed to eating dogs were equally opposed to eating pigs, and some most likely are.

For anyone who really wants to try and get at a moralistic stance regarding what type of animal meat comes from there are ways to do so, and they are related to sustainability and efficiency. Unfortunately we eat too much meat in the US to deal with sustainability right now, and the one thing we should do is eat less of it. Still, there are differences between animals. In general, the higher up the food chain you go, the less efficient the meat you produce. This is why farmed salmon are bad--you have to feed them other fish--while farmed vegetarian tilapia are good.

With mammals, herbivores like cattle, sheep, goats, horses and deer do a remarkable thing for us: they convert food--greens like grass and most leaves--that we cannot digest into food--meat--that we can. Some omnivores, like pigs, can perform another complimentary task: they convert waste that we cannot extract nutrition from into meat that we can. Dogs cannot perform these functions and neither can any completely carnivorous animal (e.g. cats). Dogs essentially eat the same food we do, so raising them for meat is counter-productive.

So there is a sustainability/efficiency argument against eating dogs that will let you happily continue to gnaw the flesh off a pig's rib bone (as I, myself, am inclined to do). Of course, this is pretty much ignoring that we do not produce beef and pork in this sustainable fashion. While these animals are fed foods we cannot digest, they are also loaded up on corn that we can digest (maybe even better than cattle can). This is where I come back to saying that we eat too much meat.

Dissapointing Obama

I don't really like David Frum, but he pretty much nails Obama in this post. We have a mild, do-little president in times that call for leaders that act, and spur on others to act.

Fat Cars Kill

I realize no one reads my blog. Hopefully enough people read this article on Slate (or even better the referred paper) to start to get this into our collective conscious:

The heavier the car, the more dangerous it is to everyone on the road that is not in that car.

If someone wants to drive around in a tank to protect themselves/their children, that should be their prerogative, but they should have to pay the cost to the rest of us for their scary vehicle. I love the idea of a tax of, say $0.25 for each pound over 2500 lbs per year as part of registration. People would think twice if it cost $1000 to register their 6500 lb. SUV every year. Even better, reverse it to credit below weight down to the cost of registration, so that if you had a 2200 lb car you could get $75 off registration every year, which would mean SUV drivers subsidizing people who they are endangering!

Tax Repatriation Holiday Suggestion

Coming from this post...I would change it from "Holiday" to "Penalty". Basically, congress could say that firms repatriating funds pay an additional penalty of 5% (in some fashion that doesn't discourage international investment/business, maybe by having it only applied to funds in excess of their net international [sales]). Then say that the penalty will be enacted in the near future, maybe next year. Companies will be motivated to get that money back into the US (which they clearly want to do otherwise the holiday idea would be worthless) before the penalty kicks in.

The result would be a rush to get funds repatriated before the penalty kicks in and less hoarding of money abroad in the future.

Big Houses

While I generally agree with the point this writer is making here, she uses a monstrously bad example. Beach front houses like those in Hilton Head, and the Outer Banks, and a fair amount of the Jersey/Deleware/Maryland shore are designed around vacation visits. People group together, rent a massive house on the beach for a week and share the cost. Bigger houses make sense if you want to rent them out. Many of the people living in these communities actually live in much smaller houses that are usually not located on the beach but a few miles--or blocks (OBX)--away.

That said, I am a firm believer in smaller, more efficient houses. Heck, I own one, and though I would like to make quite a few changes (add a half bath, finish at least half the basement, relocate my garage, maybe expand the very small kitchen), increasing the size is extremely low on the list.

Big houses are not necessarily unsustainable, but they require enough people living in them for them to make sense. Thanks to the bad economy we are already seeing more people with roommates, and more college grads moving back in with the folks, and more people renting out rooms/apartments in their houses. If energy and, particularly, transportation costs increase this will happen more and more, and people will start moving closer and closer together, living in less square footage (per person). Big houses aren't necessarily doomed, but they could become homes for extended families or even communal living situations.

Missing Something Important

I've seen a few posts on how housing starts have dropped, but since population is still growing this is unsustainable and will undergo a serious correction. Matt Yglesias follows up here with a surprisingly bad (though not, I suppose for MattY haters) graph. People per new housing start is a really bad ratio. If the population suddenly stopped growing, then we would need no new housing starts and so that would stop and that ratio would skyrocket, but would be completely and totally sustainable.

The appropriate graph, and one I haven't seen anywhere, would be population to total housing (including condos, apartments) ratio. That ratio should be more or less constant. Increasing wealth will shift it to more housing per person as there would be less sharing and more second/vacation home ownership, but as more wealth also often means slower population growth it could end up shifting both sides of the fraction. Still, that is the relevant graph.

And so long as that ratio stays above trend there is no reason for new housing starts to pick up in any meaningful way. Moreover, so long as the pickup leads--even a little--the return to trend, there is no reason to expect a major housing correction.

Lastly, of course, even though housing has national trending and inside the US mobility makes for some balance, housing is a local phenomenon, so some places could pick up while others stagnate for a century.

Wherefore College

I enjoyed college. More, I think that it is a rather important and quite powerful force in advancing societies. I seem to be hearing and reading quite a bit lately about whether college is necessary. Largely this has to do with whether it is financially worthwhile, but there have been some pieces that are a bit...unusual.

First: yes, it is certainly possible to achieve happiness and even great success without going to college or receiving a degree. It is far easier, however, for people who do go to college. There are many necessary jobs out there that do not require college degrees. There are also plenty of positions that do not really need a college educated person, but that often use that as a screen...there are arguably good reasons for this. There is also the world of entrepreneurship. This is a bit of a mixed bag in that anyone can do it, but very few can actually do it. It is only a few that have success as entrepreneurs, and an exceptional few that are actually going to be able to have success as an entrepreneur without college...this is particularly true when it comes to any scientific/engineering endeavor.

Second: college is way too expensive and students (and their parents) are accruing way too much debt, but it is still worth it when looking at overall statistics. So while picking up $120k in loans to get a fine arts degree probably won't pan out, rolling up $50k for a chemical engineering degree (most) certainly will. College grads can get better, higher paying jobs. College grads also have a broader knowledge base from which to strike out on their own.

How to fix? First no federally backed loans, only federal loans and public loans. If banks want to have student loans the fed shouldn't pick up the tab for defaulters. Second these federal student loans should be limited to the total cost for state universities in the state the students come from. So when I was living in Kansas, I should not have been eligible for federally backed loans (to anywhere) in excess of the ~$8k/year that it cost then to attend KU. Students who want to go to NYU need to cover the difference in cost with private, not federally backed student loans. Third, all federal repayment plans should be forced to end after 15 years, and should be pegged to never exceed some fraction of the student's income...say 20%. So for people who take full loans to attend state schools, but have trouble getting work, or getting work that pays well enough to cover the true cost of the loan will still be free and clear of student loan debt 15 years after starting repayment.

Alternative Sarah Palin

A very good read about Sarah Palin and something to consider. I do think it ignores the fact that her character flaws were pretty much all she had when she got pushed into the national spotlight. She didn't have a cause to pursue for America. She didn't have an axe to grind at the national level that could propel her to take on e.g. Wall Street. So her flaws were what was left and that was who she became in the run up to the 2008 elections.

David Hume's Birthday

Missed it, but here is some snippet reading. Not sure if it is where I got the idea planted but Hume says

I have long entertained a suspicion, with regard to the decisions of philosophers upon all subjects, and found in myself a greater inclination to dispute, than assent to their conclusions. There is one mistake, to which they seem liable, almost without exception; they confine too much their principles, and make no account of that vast variety, which nature has so much affected in all her operations. When a philosopher has once laid hold of a favourite principle, which perhaps accounts for many natural effects, he extends the same principle over the whole creation, and reduces to it every phænomenon, though by the most violent and absurd reasoning.

It should be read for what it is, but to me it is a reminder that all our thought has an emotional bias. Belief in objectivity is in fact an emotional/moral stance.

Also End the Nickel

...Is how I should have ended the "End the Penny" post. I'm quite alright with no more nickles and no more pennies, and I would really like for them to stop printing paper dollars and switch over entirely to dollar coins (really, we could use some $2 coins as well once paper singles are gone, but that's just me getting greedy).

Our Bad Taxation

I was playing with the US Taxpayer Receipt tool, which I like. You can enter your own tax info, or you can choose an income level. I did both just to see, then I went and figured what my taxes would be at the different income levels. The 25k and 35k levels I can't really compare with what my deductions would be because I wouldn't have my house if my income were at those levels. First thing to note is that Medicare and Social Security are the same (as they should be), so the real comparison is on the income tax...

Example $50k: married 1 child, does not itemize: $260 in taxes
If I made $50k: single, no dependents, $19k deductions: $3,800 in taxes

Example $60k: single, 1 child, does not itemize: $4,200 in taxes
If I made$60k: single, no dependents, $19k deductions: $6,000 in taxes

Example $80k: married, 2 children, does not itemize: $3,800
If I made $80k: single, no dependents, $19k deductions: $11,100

And this is set up to underestimate the taxes I would actually pay at each level with the large deduction. I don't really like dependent deductions (as I've stated here before), but the one that really killed me is the marriage deduction.

If you take a look at two married couples. Both couples bring in $80k, with one couple doing it on a single income and the other doing it on two equal incomes. At the very least, both couples should be paying the same amount in taxes...and if they joint file they do, but in reality the couple with both working and bringing in $40k each should have two workers each paying less in taxes. The other couple gets the luxury of having one of them not out working, which can be very nice even without children but is a huge benefit if they do/were to have children. The couple bringing in $80k on a single income should pay higher taxes.

This is why I think all income taxes should be individual. No married, single, married filing separately, head of household, no dependents, no deductions. Just an income box and then the resulting taxes. Now I think that would require a shifting/re-balancing of the tax levels and brackets (I like a bottom rate of 0% up to ~$25k and a top rate of 50-60% starting at $500k-$1M). Everyone files. The two married couples above would pay very different taxes, and the examples would even out (not entirely as an average $80k couple is doing it on two incomes).

End the Penny

People have a goofy emotional attachment to coinage...particularly the pretty much useless penny. Therefore it is good to read this article from the New Yorker. I just wanted to clarify something. The statement made:

...eliminating pennies would increase our reliance on nickels, which now cost almost ten cents to manufacture and so generate even more negative seigniorage, per coin, than pennies do.

is just flat out wrong. There would be almost zero increase in nickel usage, and what increase there would be would be necessarily less than the increase in dime and less still than any increase in quarter use. Its actually pretty simple statistics.

Completely random coin gathering would yield a ratio of pennies:nickles:dimes:quarters of 5:1:2:3.75 if you remove pennies from the list the ratio would be 1:2:3.75 (n:d:q). In a given handful of change eliminating the 4 pennies may mean you get an extra nickel, but it could mean you get an extra dime, which would mean you lose a nickel, or you could get an extra quarter and lose two dimes...it could also mean that you end up at an even dollar and lose ALL coins from change. The real kicker is that if all merchants were to round up you wouldn't even see the occasional shifts mentioned above: 96c back would become 95c and 39c back would become 35c...the exact same non-penny change.

It seemed an odd thing to get so very, very wrong.

The Wisdom of the Masses

There is a very difficult aspect of politics, and democracy: the understanding of the people. In a world where everyone had perfect knowledge, then their own beliefs would dictate their opinions on any of a number of issues. We don't have perfect knowledge. More, the imperfections vary in size and distribution. So whenever you read a poll that asks opinion but really requires that those being polled have a fairly sound knowledge base, you need to take results with a grain of salt. Since there have been plenty of recent polls that indicate that the general public has no clue what government spends money on, public opinion on how it should reduce deficits is pretty meaningless in terms of whether it should dictate policy.

Unfortunately, politics doesn't care how poorly informed the populace is. It only cares about the opinion of [voters]. So that poll is very important to the politicians and therefore becomes important to policy despite the fact that it could be a monumentally bad idea to have policies derived from the opinions of the uninformed.*

*This is more important with respect to energy and climate issues.