Monday, April 27, 2015

The American Dream Scam

I was shocked and surprised when I came across this article.  The title, “9 things that rule about owning a home” got my attention right away.  As I read through the nine categories I found what I expected to find, traditional and promotional information about home ownership that is either partially or mostly incorrect.  Here they are.

1.     Your money's going to you, not to a landlord.  It goes on to explain that with renting “you're just renting space,” but “money that you put into your home builds equity, the value of your home after the mortgage is subtracted. Loans taken out against your home's equity can be used to put money towards other things, such as college education.”  In reality, especially with the popularity of very low down payment mortgages, most of your payments for the initial years go to interest.  True, you are not renting space; instead you are renting money.  Before the turn of the century, the value of houses increased at approximately the rate of inflation.  You didn’t sell a house at a profit unless you intended to buy a smaller house.  About twenty years ago this changed, but we learned (or at least some of us learned) from the recession resulting from the overdue correction that the surge in housing values was mostly artificial.  Finally, the rate for home equity loans is lower, but that’s because you are risking your house, using it as collateral and exposing yourself and your family to foreclosure if it’s not paid back.
2.     You get tax benefits.  As I explained in detail two weeks ago, the tax deduction is partial at best.  About two in three do not itemize deductions so it does them no good at all.  Those who do benefit only to the extent that their total deductions exceed the standard deduction, which is automatic.  In nearly every case the tax benefits of paying a mortgage are either non-existent or exaggerated.
3.       It's forced savings.  The argument is that “those payments are coming back to you in the form of home equity, which increases your net worth.”  It may increase your wealth on paper, but if you sell the house that equity is swallowed up on a down payment for the next one.  Eventually you will have an asset that is all yours, but it’s not a very liquid asset because you still need some place to live.
4.     You get more for your money.  Sometimes this is true and sometimes it’s not.  The balance between buying and renting fluctuates based on supply and demand in the respective markets.
5.     You have the freedom to make it home.  The argument here is that you don’t need a landlord’s permission to make changes.  You can fix up everything the way you want it.  But you also need to fix everything that goes wrong and pay for it yourself.  I’ve heard it said (and experienced it myself) that when you buy a house you get a hobby:  repairing, replacing and maintaining or researching for a reliable person to do it for you.
6.     You can have pets.  Some rentals also allow pets.
7.     You'll love the stability.  Stability is one side of the coin.  The other is finding that you must move and are stuck with two mortgages until you find a buyer for the first house.
8.     You know everything about the place, because the bank required an inspection, which you paid for, before you moved in.
9.     It’s yours!  "You feel empowered that you actually own something…like you have a piece of the American dream."  Wow, if they can’t get you with the first eight, why not appeal to your ego?

Those are nine very weak reasons to buy a house, every one of them partially or mostly untrue.  I don’t think I am being unusually fussy when I point out that many of these fall under the category of what “Robert J. Samuelson termed a ‘psycho-fact,’ [a] belief that, though not supported by hard evidence, is taken as real because its constant repetition changes the way we experience life.”  As many people found out over the past 10 years, buying a house is not something to be taken lightly or to be done without reading the fine print and fully understanding the situation.

Friday, April 24, 2015

Greedy Big Businesses!

I’m not always right.  Of course I don’t put out incorrect information on purpose, but occasionally a reader takes me to task about a certain position or conclusion and I have to do some harder thinking on the subject.

In one case I was accused of putting too much emphasis on self-protection for the consumer, doing more research and not being lured in by tempting or manipulative offers and not being hard enough on the “greedy” business people who are out to separate us from our hard-earned cash.  Here is how I responded.

I see it as a matter of priorities and incentives.  The businessperson is motivated to make a profit and over the long term to build the customer base.  For the most part this means selling a good product at a reasonable price and maintaining a reputation of doing so.  I think most in business get this.  The downside is that they often let the short term interfere with the long term which leads to the bad decisions, pushing their drugs and using clever advertising to sell what they may believe is a good product in order to stay ahead of the competition.  We have some charlatans out there who don't care about return customers and would be deaf to any pleas, but the regular businesses understand.  They go wrong when they ignore the customer and react to pressure from Wall Street and other parties, in which case they would also be deaf to any pleas.

That’s why I concentrate on the citizens and consumers.  The consumer should have the priorities and incentives to spend money wisely and not be taken in by the smooth talk and psychological tricks.  This is where the pressure can be applied and where there is the motivation to listen to advice on how to be a smarter shopper.

If we get the businessperson to act more responsibly, it might hold for the short term until competitive pressure and the primary motive takes over.  So the only way to get him to respond over the long run is to make it unprofitable to act irresponsibly because most consumers are clued in to the tricks and require a good product at a reasonable price and are willing to tip off friends and even to mock the presentations that are manipulative - remember reputation and brand are sacred!

In sum, I think the incentives drive the way we approach this.  We can wish all we want for responsibility in business or we can focus on the consumer and force the outcome we expect.  Was it Sartre who said, "Every generation get the war they deserve" or words to that effect?  Well, I think we get the ads, the news, the business practices, the level of entertainment and the government we deserve based on current behaviors and the only way to change that is to change our behavior.

So when I thought about the challenge a little more, I decided my approach addressed the behavior on the right side of the interaction.  It also reinforces my primary assumption that the only way to get America headed in the right direction overall is through the cumulative effects of right behavior of most citizens in the five key dimensions.  

Monday, April 20, 2015

Perspective = Gratitude and Moderation

Here is a good illustration of how to categorize behavior into dimensions.  What do a man stuck in the cargo hold of an airliner, a welfare recipient at the arcade, and a man with kidney failure have in common?  The answer is perspective problems.

First is the story of the baggage handler working for Alaska Airlines, who called 911 to report being trapped in the cargo hold of an airplane in flight.  He apparently had either crawled in to take a nap or had fallen asleep while loading the airplane.  With no help from the emergency operator, he eventually pounded and shouted loudly enough to alert the passengers and the flight was diverted to rescue him.  (I could not find a print copy to confirm it, but heard a radio report of this incident saying that such napping by airline ground workers was not that unusual.)  The point here is that falling asleep or napping on the job, especially with our continued high unemployment rate, shows a lack of appreciation of having a good job.  Many people take their jobs for granted, looking for ways to cut corners or game the system.  They are not totally to blame, often defended by unions more interested in dues than member welfare or the financial sustainability of the company and provoked by management more interested in short-term profits than in proper training, supervision and treatment of employees.  Nonetheless, in a still shaky economy, such behavior shows a lack of gratitude.  As one supervisor used to remind his staff, “This is the best job you can get, because if you could find a better one, you’d be a fool to stay here; and I know none of you are fools.”

Many sources announced last week that a new Kansas law “tells poor families that they can't use cash assistance from the state to attend concerts, get tattoos, see a psychic or buy lingerie. The list of don'ts runs to several dozen items,” but except for nail salons, arcades and pool passes, no more of the additional  restrictions were listed in any news articles.  The point is that restrictions in Kansas go well beyond the standard list of alcohol, tobacco, gambling and adult-oriented businesses.  Critics contend that these bans are punitive, highly judgmental and mean-spirited.

Apparently the critics (and some recipients) conveniently forget that free money from the government, whether it be in the form of welfare or unemployment compensation checks, already comes with expectations, the expectation that it will be used for necessities while the citizen recovers financially.  That seems reasonable and neither punitive nor mean.  By analogy if an adult child got behind on rent and asked his parents for help and the parents later found out that it was instead spent on psychics, movies and a tattoo, they would rightly feel taken advantage of.  Neighbors and relatives would advise them not to give more money to the prodigal, ungrateful son further enabling his poor choices.  In the Kansas case, however, attempts by lawmakers to limit frivolous expenditures are mocked and condemned.  The real problem is that it has come to a point where welfare payments must be so specifically restricted to avoid misuse by those who are unappreciative and believe they have a right to spend them as they please.

Finally, comes the story of the Arkansas man whose kidneys failed due to drinking too much iced tea.  This is a perspective issue not from lack of gratitude but from lack of moderation.  More is not always better.  The truth is too much of anything is dangerous.  Even drinking too much water can kill a person.

This illustrates how seemingly unrelated stories each reflect some aspect of perspective.  Those who experience the problems and those who sympathize with or excuse them seem to forget that behavior has consequences, that shielding people from those lessons is often the most unkind action and that having perspective minimizes problems.

Friday, April 17, 2015

Catch Me If You Can

“It’s not a foul if the ref doesn’t see it.”  This is how some high school soccer coaches, among others, instill a sense of honor and fair play in the youth of America.  When they grow up, I suspect they turn into the kinds of whiny adults who think red-light cameras are not fair and an invasion of privacy.  When they run the red lights, endangering themselves and others, and a live cop doesn’t catch them in the act, it’s a victory over the system for these too busy, self-important, above-the-law citizens.  All those rules are only for peasants and suckers.

One would hope that this attitude and the behavior it elicits are rare, but politics in Chicago tells us different.  The USA Today reports how the issue of red-light cameras has become a political hot potato as the mayoral election draws near.  Both candidates are promising to make them go away.  Though the practice and objections are fairly widespread throughout the US, in “Chicago, which has the most expansive use of red-light cameras in the country, the public outrage over red lights has been louder than most.”  In fact, according to a local poll, “nearly three out of four Chicagoans want [Mayor] Emanuel to eliminate or reduce the use of the cameras, which are used for the detection, photographing and fining of lead-footed drivers who blow red lights.”

The leader of the opposition to this practice, “who has been hit with more than $1,000 in red-light camera tickets," (at $100 a pop) has held rallies and has a website dedicated to gathering support for their elimination.  (If it had been rattlesnakes instead of stoplights, this guy would have been dead long ago.)  But he’s not alone in thinking behavior, even illegal behavior, should not have consequences.  According to the Chicago Tribune, 4 million tickets have been issued since 2007!  (One wonders what the implications are for those municipalities considering using cameras to identify drivers who blow by stopped school buses as they load and unload children.)

Whether the cameras actually make the roads safer is unclear, but an easy way to avoid getting a ticket is not exactly rocket science.  Any third-grader could solve this one.  It’s probably “the principle” that everyone is hung up on, the principle that it’s not fair to get a ticket without human interaction; but they would be wiser (and richer) if they got hung up on the idea of personal responsibility instead – or as one contributor to the Opinion Page in Des Moines put it, “If you're guilty — and that's usually the case — pay up and shut up.” 

It's time to start taking responsibility, respecting the law as well as ordinary social conventions. Responsibility is closely related to common courtesy.  Yesterday, as we parked at the grocery store, my wife pushed someone else’s shopping cart from where they had left it eleven steps to the cart corral.  It was nowhere near a handicapped parking space, so there can be no other explanation than that the (probably overweigh and in need of exercise anyway) shopper felt that they were too busy or too important to take those exhausting and time-consuming 22 steps.  All those rules are only for peasants and suckers.

Monday, April 13, 2015

Is It Really Tax Deductible?

As we near tax day it makes sense to review a matter most people either don’t understand or don’t really think about – the issue of tax deductibility, what it really means and how people use it to sell goods, ideas and charitable causes.

Many years ago the interest you paid was all tax deductible, whether it was for credit cards or a car loan or whatever.  This changed in 1986 ending deductibility for all interest except home loans.  No doubt that the realtors and builders had some influence in the exemption of mortgage interest so they could continue to sell the advantages of deductibility. 

What happened next?  The banks began heavily marketing home equity loans.  Buy your car but use your house as collateral and still deduct the interest.  (This is another example of how we must look after ourselves rather than relying on consumer protection agencies, because when it comes to finances, bankers are a lot smarter than politicians and will come up with new products to take advantage of any rule changes.)

When we hear this promise of tax deductibility from anyone, what does it really mean and how much of an advantage is it?  Since fewer than one in seven people even look at a tax form anymore (see graph), preferring to hand the box of receipts off to someone else or to wade through the hundreds of questions delivered by tax preparation software that mysteriously translates all the answers into the lines on a 1040 form, I think most don’t have a clue about the mild deceit going on here.  Not everything that is legally tax-deductible and listed on your return provides any benefit at all.

Here’s how it works.  Everyone can choose either itemizing those deductions or claiming an automatic standard deduction.  Based on data from last year only about 31% chose to list all their deductions.  The rest took the standard deduction.  Deductions that may be itemized include mortgage interest, property taxes, certain other taxes, contributions to eligible charities, medical expenses (but only for the amount above 7.5% of your income) and certain other unreimbursed employee expenses, such as job travel, union dues, job education, etc.

The standard deduction, the one you could get no matter what is $6300 for a single person and $12,600 for a married couple.  So the value of the first $12,600 of deductions for a married couple (filing jointly) is exactly zero!  You could get it any way regardless of your other decisions!  Suppose you have no major health expenses, mortgage interest of $6,000, property tax of $3000, state income tax of $2500 and donations of $1500; the total is only $400 above the standard deduction.  If you are in the 25% tax bracket, your taxes are lowered by $100.  On one hand, it’s nice to get an extra $100 back from the government.  On the other hand, is that what you expected when the realtor sold you the house with the promise of tax deductibility?  (And don’t forget, the interest paid will be going down every year as the principal is paid down and the standard deduction may go up, so you have less chance to reach that break-even point.)

I know it’s usually painful to think about taxes at all, but when someone is using an idea to sell you something, it’s wise to be informed and to have done a little of the math.  In reality the only decisions that should be influenced by the promise of tax deductibility are the ones made after you know that the initial $12,600 has already been met.