Why Is This So Important?

The behavioral model is very important for a number of reasons.  One is that the focus on behavior moves the discussion away from personal attacks.  If a person’s behavior is good, it is recognized as such, to encourage more of the same.  If a person’s behavior is poor, the discussion is not about attitude, motives or intentions; it’s about what changes to behavior will make him or her more successful.

Another important aspect of the model is the insistence that we all improve behavior in the five key dimensions.  This is no longer optional.  The world is getting more complex at an accelerated rate.  We cannot face that complexity with the same casual approach that suited our ancestors even a few generations ago.

Eric Schmidt, Executive Chairman of Alphabet’s board of directors, the parent company of Google, made an interesting observation at a technology conference in 2010:  “Every two days now we create as much information as we did from the dawn of civilization up until 2003.”  And that was 7 years ago!  He added that he doesn’t believe people are ready for what’s coming in terms of technology.  Of all that information how much is accurate or even useful?  Yet we are exposed to so much more every day at an increasingly alarming pace and must cope with it.

How did our grandparents deal with the fear of phishing emails or identity theft, traffic light cameras or drones and other invasions of privacy?  They didn’t.  Was anyone concerned about teen cyber-bullying or “sexting” even a few years ago?  In years gone by we had locks on our doors instead of security systems, and we thought hacking meant you had a bad cough, not that your savings or personal information might have been compromised.  No one was “addicted” to their “device.”  The frequency and stress level over the latest health news or food warnings were significantly lower.   The world didn't screech to a halt when the computers crashed.  And today credit cards, home equity loans and other financial tools make it so much easier to go into debt and stay there.

What about the avalanche of advertising we face?  The ad-blocker on my browser counts the ads as it blocks them.  One day I made note of the time as I caught up on (and stored and disposed of) personal email.  In 30 minutes the software blocked 97 ads.  That’s someone trying to sell me something at a rate of more than 3 times per minute.  Advertising exposure within our society is exploding.

Here is another example.  Last week I received an email telling me I may be a “Class Member” in a lawsuit against Staples “if between March 24, 2009 and April 25, 2017, you [1] bought a Rewards-eligible product and a non-Rewards eligible product in the same transaction, [2] used an item-specific coupon on the non-Rewards eligible product, and [3] were negatively impacted by Staples’ pro rata coupon accounting.”  If I don’t want to opt out of the settlement and I submit a claim form, I would be “eligible to receive $10 in Staples Rewards.”  (Further reading told me the class representative – I think that means the guy who sued – will get $5,000 and the law firm will receive $500,000 in fees and cost.)

How in the world do I know if I was negatively impacted?  Should I pull out all my Staples receipts for the last eight years to check?  Just reading this and trying to understand it is not worth $10 of my time, no less filling out an online form.  Yet apparently this stuff is happening every day to punish companies for apparently shady activities, although they admit no wrongdoing and settle to avoid the hassle.

I read recently that if everyone took the time to read only the privacy policies on all the websites visited, the annual cost in lost work time would be over $780 billion.  And that doesn’t even address what rights we might be signing away when we check the box without reading the even longer “terms and conditions.”

We must face it.  The world is getting more complex at a speed nearly impossible to keep up with.  People think technology is wonderful as they play games on their phones, but the technology is a double-edged sword with significant dangers.  As the robots are coming for our jobs and the hackers are stealing our data, the degree of critical thinking, discipline, responsibility, economic understanding, and perspective that served humanity in the past will no longer cut it.  We must do better or be overwhelmed.

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.

Your House is NOT an Investment

Recent news reported the 100 hardest hit cities where the mortgage crisis lingers.  Homeowners are “stuck in loans for more than their home is worth.” This situation of “negative equity” or being “underwater” ranges from 22% to 56% in these metropolitan areas with Hartford, Connecticut the highest.  It’s not only an East Coast issue, though, the problem is shared by cities like St. Louis, Milwaukee and Seattle.

One problem is that people have been led astray by the realtor’s and financial advisor’s propaganda about the “American dream.”  There is no shame in renting.  In fact where there are commonly two categories on credit applications and other paperwork:  rent or own, there should probably be three:  rent, own, or buying.  This would remind us that anyone paying a mortgage does not yet own the house, as many who went through a foreclosure now understand.  And those who are “underwater” right now are less well off than renters, since they are making monthly payments but can’t easily “break the lease” if a better opportunity arises or call the landlord to take care of maintenance problems.

A house should not be considered an investment.  This only encourages Americans to buy more house than they need and, in some cases, more than they can afford.  Advisors tell us that it is an investment, using the leverage of borrowed money, not our money, to purchase an asset that will appreciate.  We have little at stake, but get to keep all the appreciation in value.

But investments are risky.  Sometimes they don’t appreciate.  Sometimes, though rarely, houses lose value.  This has been the case lately.  “After bouncing back smartly in 2012 and most of 2013 following the 2006-09 real estate crash, the housing market began slowing last fall.” That’s eight years of turmoil, and the investment at risk is the roof over your head (and your family).

In the whole housing-as-an-investment game, some have been lucky and some have been very unlucky.  When we retire, we still need a roof over our heads.  So when it’s time to cash in our investment, we get the often impractical advice to downsize or move to an area of lower housing prices or take out a high-cost reverse mortgage.  Wouldn't it make more sense to live in the right house in the first place with retirement savings in more accessible assets?

Down with Home Equity Loans

Driving past a local bank recently, I was surprised (perhaps even mildly shocked) to see a sign reading: “Put your home equity to work for you.”  What could they be thinking?  Well, the banks are thinking that they can make a loan and collect fees and interest.  The customers are likely not thinking very clearly.

There are still so many people with zero or even negative home equity, owing more than the value of the house, “upside down” or “under water” from the Great Recession.  They believed the line the banks (and realtors) fed them about putting almost nothing down and counting on the market to push the prices up steadily.  When the bubble burst they were left holding the bag.  Some walked away and some were evicted but many lost their houses.

Now, before the economy has fully recovered, banks are at it again.  The advice you get from bankers, realtors and financial advisors serves their purposes,  not yours.  It produces interest, fees and commissions.  A house is not a good investment.  It’s usually hard to sell, so you can’t get your money out right away for emergencies.  It doesn’t always appreciate.  The tax deduction is less of a benefit than most people understand (see The Myth of Home Equity, March 5, 2012).  The government only helps you pay a portion of your interest and you still pay more than you borrow.  Finally, when you do sell it, you still need some place to live!  That means you have to buy another house that has been going through the same market changes.  Unless you are a speculator, timing the market, or willing to put a lot of time and energy into a fixer-upper, you have to be very lucky to come out ahead.

Those advisors continue to call it an investment, buy a house bigger than you need (paying interest and sales commissions) and count it as retirement savings or keep cashing in your home equity to invest in the stock market (paying more sales fees) where it will grow more quickly or, worst of all, take the money out and reward yourself with a nice vacation – “You owe it to yourself; you’ve worked so hard, etc.”

Well call me old fashioned, but my advice is build up that equity and don’t even think of it as equity or an investment.  Think of it as having a roof over your head that no one can take away from you.  When the market goes up, good.  When it goes down, too bad, but at least you don’t have a bank or collection agency knocking on the door.  You’ll never be able to afford your neighbors' luxuries or exotic vacations, but you won’t have their headaches either.  This behavior is not possible for everyone.  I understand there are exceptions and personal situations.  But when you drive by the sign tempting you to “Tap your home equity,” I think you will be a lot happier in the long run if you just keep driving.

The Myth of Home Equity

Back in the 1980s all the interest you paid was deductible from your income taxes:  car loans, credit cards, mortgages, etc.  In 1986 Congress passed the Tax-reform Act, ending deductibility for all interest except home loans.  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.  (I always say that when it comes to finances, bankers are a lot smarter than politicians.  See blog for July 1, 2011.)

Formerly, if you took a second mortgage on your house, you were in dire financial straights, but now you were encouraged to be smart, tap your equity and be rewarded with a deduction.  What they didn’t tell you was that the equity from appreciation really wasn’t profit.  As the price of your house rose, so did the price of all the others.  Cash-in your house and you still need a roof over your head, but now they all cost more.  Equity growth through appreciation was just a way of keeping up.  Good equity comes from paying down the balance, which doesn’t happen if you keep borrowing against it.  The "American dream" is to own a house, not to live in a piece of collateral.

What else they didn’t tell you was that a house with no equity is the same as a rental with no landlord.  You are responsible for repairs and maintenance.  You have all the work of a landlord but someone else (your bank) collects the “rent” payments.

Third, they didn’t tell you that for the average person the tax deduction is at best, modest.  About 2/3 of taxpayers take the standard deduction; it does them no good at all.  If you itemize you could always have gotten the standard deduction, so you only really benefit from the amount greater than what you would have gotten anyway.  If your total deductions, including mortgage interest, are greater than $11,600 this year (joint return), your advantage over renting is only the excess, not the entire amount.  You need substantial other deductions to get the full effect, and most of us don’t.

Of course they didn’t tell you that housing prices might fall.  It was unimaginable! – until now.  Then you find yourself underwater.  The irony is that many people who got into this situation treated buying a house as an investment rather than a long-term purchase.  What else do you buy expecting it to increase in price?  Do you think about a new car depreciating as soon as you drive it off the lot?  Do you then park it on the side of the road and walk away because you owe more than it’s worth?  Have you tried to sell your refrigerator or big screen TV lately?  People who wouldn’t dream of risking money in the stock market treated a house as an investment and got burned.

Finally, they don’t tell you that if you don’t eventually pay off your mortgage, you will go on paying for the rest of your life.  It’s not good to be planning your retirement and realize that you have 25 years of mortgage payments to look forward to.  (Financial advisors will tell you never to make an extra house payment, because it's smarter to invest that money - with them, of course - who get the commission.)

This is a critical thinking issue – believing a rosy marketing picture about tax deductions and the American dream, without thinking it all the way through.

It’s also a discipline issue – looking for ways to satisfy today’s itch with tomorrow’s money.


When many behave this way, it results in serious societal consequences.