Wednesday, November 23, 2011

Fester's financial advice, housing.

There seems to be this misconception out there that housing is a commodity that should rise in value over time and at least keep up with inflation on the average. This is not really the case. Housing is a consumer good, just like your car and television, and will decrease in value over time as it is being used more and more. I believe there is a case to be made that land is a commodity and will generally maintain or increase in value over time, but what sits on that land is going to get wore out, rot away, and otherwise lose value. It is hard to say that the roof on a house will lose value, the carpet will lose value, the appliances lose value, and yet the overall house should gain in value and somehow expect this to make sense in the long run.

The idea that housing “always rises in value” is based on faulty logic and a skewed perception of reality, mostly by people who live in cities. It is true that in many areas of the country if you look at a chart of housing values over the last 100 years or so, you will see a steady increase in value and this has skewed the perception of the people living in those areas and created an expectation that this is the norm, when in fact it was a fluke. Many things happened in that time that account for the rise in value of (some) housing. First, the population grew very quickly. Second, there was a mass migration from rural areas to urban areas. Third, the banking system was set up to be controlled by the central bank that allowed fractional reserve lending to become the norm. So what happened was that demand increased for housing in urban areas and at the same time it became easier to get loans from banks (and unlike other loans the interest could be deducted from a person's tax liabilities), creating a century long boom. I don't expect this to hold into the future. The increased demand for the land the houses sit on this made up for the all or some of the loss of value in the buildings sitting on the land in urban population centers. The recent boom was because low interest rates allowed consumers to borrow more money for lower monthly payments and this brought up the overall value of the housing as consumers realized that they could buy more expensive housing, sellers raised their prices respectively. I know there were some other factors, but this is the very basic story.

One thing to note is that housing has went down in value in many places, rural America, industrial cities that have lost large employers (Detroit, Cleveland, etc). So if you have this idea that housing should always increase in value, I would like you to knock that thought out your mind right now, as it is not a universal truth. You may be lucky enough to have purchased a house in a community that will still be a desirable place to live well into the future and so your housing might hold its value, but there are no guarantees and you should not hold any expectations of such, especially as the population stops increasing and the migration from rural farm towns to urban centers comes to an end (at this point there are not a lot of rural people left to migrate and technology is not replacing farm hands at nearly the same rate as it was over the last 100 years). My understanding is also that the US would be experiencing a negative growth in population if it were not for immigration (which the government seems to want to further restrict).

Does this mean that it is a bad idea to buy a home? No. The reality is that you need a place to live, and if your choice is to buy or to rent, then you have to consider your own needs and your lifestyle to determine which makes financial sense to you. If you plan on living in the same place for 10 or more years, it is likely to be better to buy. If you move around a lot, then renting is better. If your choice is to rent a cheap one bedroom apartment or buy a big four bedroom house, renting is likely the better option since you need to compare apples to apples when looking to buy. It may make sense to buy a condo that is similar to what you rent, but likely would not make sense to buy a house that is far more extravagant than what you would chose as a renter. Due to the market distortions created by government, buying is often the better choice, they artificially restrict new construction through zoning and other laws, they allow you to write off the interest on the mortgage from your taxes, and distort the market in other ways, but you should not count on these things from the government into the future, so just be aware it is a gamble. Buy a house for the same reason you buy a car, you need it for its utility, not for its investment potential. If you want an investment property, either learn the real estate trade, or buy a REIT, but don't buy the house you plan to live in and expect it to be anything other than a consumer good.

Thursday, November 10, 2011

More about Warren Buffet and this claim he only pays 17% in taxes

I hear this "the billionaire only pays 17% in taxes, which is less than his secretary" crap all of the time, it comes from an article that Warren Buffett wrote claiming as much, only he lied and now the left uses that as some sort of rallying call. The truth is that Buffett pays more than he said in his article. First off he is not subject to income taxes because he takes no income (to be more accurate he takes an income of 100k, which is tiny compared to his billions in net worth) so when he needs money he sells BH (Berkshire-Hathaway) stock and only pays the 15% capital gains tax and 2.4% in other taxes I assume he is referring to the capped social security taxes and the income tax on his salary), so that is where he gets this 17% figure that gets cited over and over again.

The problem is that he owns the majority of BH and the corporate taxes they pay, really comes out of his profits and pockets. Some companies pay almost nothing in corporate taxes because they award the CEO huge amounts of pay and the CEO then pays high personal income taxes, with BH they pay corporate taxes on the profits other companies might have paid their CEO and then written off their bottom line. Buffett indirectly pays the corporate taxes, and then also pays the capital gains tax when he sells his stock. He is really paying a much higher tax rate than he claims, and I don't believe he is too stupid to understand this, so I can only assume he is lying for some political reason.

It is hard to know how much BH pays in corporate taxes since it seems they owe back taxes, but if they were paying the taxes it would be a corporate rate of 29% so add that to the 17% Buffett is paying in capital gains and he is paying closer to 50% in taxes.

The thing that really irks me about the whole thing is that he is looked at as a hero of the left for claiming he supports higher taxes for the rich, all while being a tax dodger himself and the left eats it up like candy. He has also benefited from the bailouts, owning major shares in Goldman Sachs, Wells Fargo, US Bancorp, and American Express. In the Peter Schiff goes to Occupy Wall Street video he is confronted with some protester who throws out this idea that “the rich pay 17% in taxes”, this comes from Buffett's article, but they are also down there protesting against bailouts and the rich, but still they will hold up his article as if it was written by god himself.

Wednesday, November 9, 2011

Occupy Atlanta, being duped by irresponsible Cop

When I got up this morning I found a facebook friend had posted this article about Occupy Atlanta setting up encampment to save a police officers home after the he had written an email explaining he was being foreclosed on to someone in the Occupy movement. I attempted to try and find out why this police officer was “unjustly” being foreclosed upon as the protesters are claiming, and I was unable to find anything. Police officers have extremely stable jobs with decent wages, most making 50k or more a year. Interest rates are extremely low right now, I really have to wonder why this officer could not afford to pay his mortgage. I ended up finding that the location of the house is “4197 Shoreside Circle Snellville, GA”. This allowed me to find out information on the house, but not the Rorey family, However, finding out about the house was enough to cast further doubt in my already suspicious mind. According to Trulia this house last sold on December 27th, 2010. Less than a year ago, for $172,454, which should be affordable for a police officer. You normally have to be several months behind in your mortgage before the foreclosure proceeding begin. This indicates to me that they moved in less than a year ago and basically never made a mortgage payment, I am not sure I can see the unjust nature of the foreclosure. I think these occupy people are being duped by irresponsible people to support a cause that will make them look even more foolish than they already appear to be.

Saturday, November 5, 2011

Engineering Students drop out or change career paths

I found this article on why engineering and science majors seem to drop out, or change directions when in college. It is interesting and I believe it is reflective of the failures of government education. Engineering should be one of the most interesting fields of study, and yet the government somehow manages to kill the desire of young people to pursue this career. I am in this field and have found something peculiar, I work in an engineering role without an engineering degree, some of my co-workers have engineering degrees and some do not. All of my co-workers who have engineering degrees fall into one of two categories, either they were older when they got the degree or they got their degree (or the majority of classes) from a non public university setting, like Devry, or they started out in a community college and then moved on to a more formal university. I don't think I work with anyone who went into an engineering degree straight out of high school and graduated with an engineering degree. I have two cousins who started university after high school in science and engineering studies who both switched out within three semesters. There is something wrong here, both of these boys are extremely smart and should have thrived as engineers.

If you know a young person who is considering becoming an engineer, I would advise them to not go straight to university studying engineering. It seems to be the death nail and seems to be a motivation killer, with all of these dry math lecture courses killing the desire to keep going when in the real world most of these equations are not pressing things to know. The field is really pretty fun as you see the things you do giving you the desired effects and solving puzzles when things do not work the same way you expected them to. If you want to be an engineer, the better path seems to be to start out with a smaller educational goal then move on to an engineering degree. I have managed to work in an engineering field with only an associates in telecommunications, but I work with many who started out getting associates in computer networking or electronics or similar fields and who then went on to get bachelors degrees. Really there is a decent demand for skilled employees in computer/electronics and engineering fields and it is high enough that employers are often willing to take a chance on a non-degreed person if they have shown proficiency and really the pay is not that much different between a fully degreed engineer and a person working in an engineering field with a degree in information technology or similar. After you manage to get that first job, experience becomes more important to future employers than education.