Friday, May 30, 2008

To Rent or Buy?

Many people in their twenties are renting, including Jenn and me.

The traditional American culture says that you grow up, graduate from college, get married, buy a house, have some kids and then retire. While I have a lot to say about all of those things, I'm going to just comment on the "buying a house" part.

Common House buying advocates cite the following as great reasons to buy a home:
  • Tax Deductions
  • Pay yourself instead of paying your landlord
  • Build equity (good long term investment)
What I want to do is just compare renting vs. buying for a married twenty-something who might move in say 5 years. You'll see ads for, "Own for what you're paying in rent!"

I'm going to have a quick little table on a 30 year fixed mortgage for a $200,000 home. This might be a 2 or 3 bedroom single family home with 1 1/2 or 2 baths in some parts of DuPage county (Carol Stream, Lombard, Glendale Heights) where I live. I'm not say that this is your price range or mine, but it's a nice round number and something we can use for a conversation.

Step One is that you're now borrowing money from the bank. Let's assume you're a good little saver and you put 10% or $20,000 down. Good for you! Now you'll need a loan for $180,000. Fortuantely, you have good credit, because you're not only a saver, you're good at paying off credit cards on time. You have some student debt, but hey, you're 20ish.

A $180,000 loan would make the principle plus interest equal to roughly $1,080 a month with a 6.25% loan and no points.
"$1108a month! Wow, that's not much more than my rent, might even be less than rent! Where do I sign?"

Not so fast my entitled American peer! You have to pay property taxes too. I know you knew that. Buy how much can that be? Quite a bit! I looked around DuPage county and found most $200,000 homes have about $4,800 a year in property taxes. This varies widely from place to place, but in the near Chicago suburbs, this is going to be within 20% of what you're going to pay. This nicely rounds up our total mortgage payment at this point to about ($1108 + $400) $1,508 a month.

But of course, you knew about the property taxes, and this isn't a shocker for you.

Where do I sign? Give me the loan!

Step one is to sign your checkbook for a separate check to the bank for closing costs, not just the down payment. I'm not talking about buying points (prepaid interest) I'm talk about costs like:

  • Lender Feeds
  • Appraisals
  • Title Insurance
  • Tax Services Fee
  • Courier Fees
  • Flood Check Fee
  • Closing/Escrow
  • Recording estimates a $200,000 home with 10% down in 60187 zip code would have closing costs in the
$2,400 range. That's ZERO points. Just the "cost of doing business."

After you cut that check, you'll find out that since you didn't put a down payment of 20%, you'll have to pay for mortgage insurance, about $90 a month. (On top of the $1508 for principle and interest and property taxes.)

So now we're at the point where you can own your own home for the low low price of just $1598 a month. You're paying yourself, not your landlord, you have a nice fat tax deduction and your house is appreciating. You're sitting pretty!

Many calculators assume that you spend roughly 1% of your houses value on maintenance costs each year. This includes things like maintaining appliances (refrigerator, air condition, furnace, hot water heater, garage door, etc) and general maintenance on items like the roof, windows, screen doors, door knobs, the driveway, flowers and landscaping and chores like mowing the lawn, clearing snow in the winter, salting your walkways, etc. On a $200,000 home that's $2,000 a year. It might seem a little high, but I'd imagine it's close.

So let's take a look at this sort of thing and assume average house price increases, property tax increases and other elements of inflation, all 3%. Contrary to popular belief, property taxes do rise, so your mortgage does too. Depending where you live, property taxes could raise quite rapidly if you're in a still-developing suburb in the far west Chicago burbs.

YearHome ValueMortgage PaymentMaintenance CostsPrincipleInterestMortgage InsuranceTaxesTotal DeductionsStandard DeductionDifferenceTax Back



The other funny thing is that the "great taxes breaks" people talk about aren't as neat as they first sound. Sure you can deduct property taxes, mortgage interest and even mortgage insurance from your taxes, but then the standard $10,900 tax deduction goes away that you've been getting all along, so you're only deducting the difference. In our first year example, the deduction difference is $6,170 dollars! However, it's a tax deduction, not a tax credit, so you're only getting back an amount equal to your tax bracket. If you earn between about $35,000 and $70,000 a year, that's just 25%. If you earn over $70,000 a year, the next tax bracket is only 28%

So what is this telling us?

If we were to sell this house after 5 years for $225,102, subtract 6% that goes to the buyers and seller agents ($13,506) add in the tax benefits ($7,222) and principle that I paid ($11,993) and subtract out my remaining loan amount ($168,007), I have...

Whoo hoo!

In 5 years I am sitting on $33,109 dollars! Unfortunately, if you were paying attention, you should be very, very alarmed. You actually started with $20,000 for that down payment, and $2,400 for the closing costs, and you put in $10,618 of maintenance.

Total Costs of Ownership:
$20,000 + $10,618 + $2,400 = $33,018

So the last step: $33,109 - $33,018 = $91.

So your "investment" after 5 years yielded you $91. I won't bother with the math, the rate of return is basically 0%.

Sitting in a passive savings account at 3% interest would have turned that $20,000 into $23,185.
If you had been able to rent and save just $300 a month over those 5 years ($1,300 gets you a pretty nice place!) You'd be sitting on an extra $4,173
if you just put that savings in a passive 3% yield savings account. Total extra cash after 5 years: $23,185 + 4,173 = $27,348.

Renting implies I earned $7,348, while owning means I made $91. While I was renting I had more cash flow and more liquid assets, cash just in my savings account, ready for an emergency. At best, the homeowner has a home equity loan where they can borrow and pay interest on their money.

Now you can argue that you won't spend $10,618 on maintenance over 5 years - this is quite possible, but we must agree you are spending more than $0. Think about it - you move into a house and you decide you want to upgrade a few things, maybe replace an appliance or two, fix a leaky roof, waterproof the basement, the furnace goes out, neighbor kid breaks a window, etc. These are things that have real costs associated with them. Mowing your lawn isn't expensive per say, but do you own a lawnmower? You'll need to buy one if you don't.

That's all I have for this post for now.... comments welcome!

Thursday, May 22, 2008

American Airlines Makes a Dumb Move

The Seattle Times has some interesting comments about how American Airlines is charging passengers $15 (each way!) for their first checked bag.

As a frequent traveler, I don't check bags when I travel for business. I have a carry-on that is stored in the upper bins of the plane and my laptop bag goes underneath my seat. This is very typical of most business travelers.

So how does this affect me? In plain terms, there is going to be serious "bin rage". Infrequent travels violate a ton of overhead bin etiquette. They put over-sized luggage up there, purses and coats, laptop bags and anything else they don't want to put under the seat in front of them. This is why when the last 5 people show up on a plane, they're always hunting around for bin space and inevitably must check their back plane-side. This causes delays and is a total pain for everyone on board.

What we have is essentially the opposite of what happened with the 3-1-1 rules a while back , where carry luggage was allowed to only have containers of 3 oz or less of liquids in 1, 1 quart size bag. Because people didn't want to go through the hassle of getting smaller containers of deodorant, contact solution and toothpaste for their carry-on baggage, the amount of checked baggage dramatically increased.

Now because of $30 being added to your fare, people will be not only bringing back all that luggage, but bringing on more luggage for those bins. The flight attendants are going to turn into luggage police for what is already a totally chaotic boarding process for the infrequent traveler.

One Last Gripe:

Flying Northwest yesterday and Tuesday, their new (to me) boarding process is:

  1. "Northwest Executive Passengers and First Class Passengers" then
  2. "All Rows All Seats"

So you have 100+ people standing in line to board instead of grouping them by seat location or other options. Chaos! Shame on you Northwest!

Saturday, May 10, 2008

Re: Living together before marriage

My friend Jaime had an interesting post about couples living together before marriage.

(Before I continue, as part of disclosure, I'm married and have been married for a little less than a year, and my wife and I didn't live together before we were married.)

Jaime hit on a couple of really logical thoughts on this. Living together before marriage is absolutely a new phenomenon, since 1960 the number of unwed couples living together has increased 9 fold. However, if you look at the way marriage has evolved culturally in the United States, it makes sense that this has become popular. And when I say popular, I mean really popular. The below image is courtesy of a study by the University of Queensland, Australia. Though this isn't a U.S. statistic, the exponential trend is similar for many western countries.

However, just because this is a new phenomenon, doesn't mean that people didn't see the writing on the wall, like this 1987 article from the New York Times, "Divorce May Be the Price of Living Together First"

Dating and marriage in the United States has traditionally been three parts:
1. Dating for a period of time and then discussing and proposing the idea of marriage
2. Getting engaged for a period of time to plan the wedding
3. Committing to marriage as long as both husband and wife live.

The major problem we have now is that the commitment part has left. Divorce rates in this country are astonishingly high. As someone who has been married for only a year, (and don't take this as a testimony of marital dissatisfaction, quite the opposite actually) I can see how some people get divorced - marriage is hard sometimes and it takes a lot of effort to work through problems! As our culture has rapidly placed greater and greater value on the individual, other values, like commitment, get squeezed out.

To take this a step further, when divorce isn't an option, you have two options if your marriage has problems:

1. Be miserable (extreme example)
2. Work it out

The problem today is that a socially acceptable third option has crept in:

3. Leave ("Upgrade" / "Get what YOU deserve")

since option 2 has become less valuable and being personal happiness has become the pinnacle of American cultural goals.

To circle back to cohabitation, because the option of leaving a marriage has become more acceptable, most people chose to cohabitate to "test out marriage" and to "reduce the odds of failure".

My thesis is that cohabitation has only risen because divorce has tranformed from taboo to a realistic option in American culture. If divorce was not an option, couples wouldn't need to "test it out" or give it a "trial run."

Though on the surface cohabitation might sounds like a logical trial period to improve marital satisfaction, study after study has shown just the opposite occurs. Couple who live together before marriage are twice as likely to get divorced as those who live separate before marriage. Michael McManus, below, states quite clearly that a "trial marriage" (cohabitation) is more likely a "trial divorce".

While my friend Jaime admittedly she hadn't done any research about cohabitation (fair enough, she's honest) and wasn't aware of data supporting or refuting the odds of cohabitation relative to a successful marriage, I'll quote this recent article from the National Review:

Kathryn Jean Lopez: What’s so bad about living together?

Michael McManus: Couples who live together are gambling and losing in 85 percent of the cases. Many believe the myth that they are in a “trial marriage.” Actually it is more like a “trial divorce,” in which more than eight out of ten couples will break up either before the wedding or afterwards in divorce. First, about 45 percent of those who begin cohabiting, do not marry. Those who undergo “premarital divorce” often discover it is as painful as the real thing. Another 5-10 percent continue living together and do not marry. These two trends are the major reason the marriage rate has plunged 50 percent since 1970. Couples who cohabit are likely to find that it is a paultry substitute for the real thing, marriage.

Of the 45 percent or so who do marry after living together, they are 50 percent more likely to divorce than those who remained separate before the wedding. So instead of 22 of the 45 couples divorcing (the 50 percent divorce rate) about 33 will divorce. That leaves just 12 couples who have begun their relationship with cohabitation who end up with a marriage lasting 10 years.
I think what's important to note is that relationships are much more than odds. I'm completely convinced that marriage isn't merely a roll of the dice (more statistically correct today might be, "flip of a coin") in terms off success or failure. Things like age, length of dating, and education of both parties also have a substantial impact on the "odds of success" for a given marriage.

All this aside, in my mind success in marriage wholly lies on the commitment of the husband and wife to make it work, even when it's extremely inconvenient, messy or otherwise difficult.

The National Review article above also mentioned something about divorce reform, though I haven't done enough research or thought about it enough to have an opinion.

However, I do have an opinion that among the most important qualities desirable in a spouse is their ability and commitment to work through difficult problems.

I'll probably write more about marriage later, but Jaime inspired me to express an opinion. (Hopefully she takes that as a compliment!)

About this blog...

I was blogging before it was cool, before it was called blogging, and when it was back on AOL. Back when having graphics as a background on a web page was the de facto style and you had to learn quite a bit of HTML and markup just in order to write. I had numerous musing including (gasp!) poems, short stories, and a disproportionate amount of essays in a series titled, 'the next girlfriend'. I also had, interestingly, a lot of struggles with faith and surface level conflicts with evil's existence in a world created by a loving God.

Looking back, the reasons I wrote things like that is because I didn't have people to confide in and be vulnerable with. What I'm finding out is that I wasn't alone then in my yearning, and that society's comfort with being vulnerable is decreasing ever so gradually.

When I talk about being vulnerable, I mean sharing deep secrets, weaknesses, sins, hurts and longings that might make you appear weak, foolish, desperate or pathetic. I desperately want to have reciprocally vulnerable and authentic relationships with people I live life with.

So though the last few paragraphs might seem a little "all over the place" in terms of thought.. they allude to basically this: My writings in this blog won't be a place to be vulnerable with the world. I have a wonderful wife and great friends to do that with. Writing here will be more about ideas and less about needing an outlet. It's very freeing indeed!