Tuesday, February 5, 2013

So about that American Dream


I recently finished a history of the Anheuser Busch family – while I realized mid-through that it was most likely yellow journalism and of dubious quality, what I found striking was how closely linked the family’s ability to shmooze /connect /donate/ sway politicians was to the success of their company.  Truly, to understand a situation, it is so helpful to understand what the interests and motivations of those involved are.  A really simple situation comes to mind – I booked a conference room at work for a meeting, and when one of my colleagues got to the room, he asked incredulously “why are we meeting in THIS room?” because he’d had to trek all the way from a different floor.  I laughed and pointed out that this conference room was about 5 feet from my desk – so the meeting was in that particular conference room because I had booked it and it was convenient to me.

Hence my bold statement: the American Dream of owning a home – might kind of be a scam.  I can see why the government, businesses (employers), and businesses (non-employers) have a vested interested in having more Americans as homeowners.  People with vested interests in a property and a community, people with roots, people who are stable – those are people large companies was to employ, and the government relies on them to keep communities safe.  And of course there are large and powerful industries relying on the consumption of property – realtors and real estate agents.

In economic terms, everything has absolute and relative value: stocks aren’t separated into those you want to buy and those you don’t, but rather by what price you’re willing to pay for them.  So is the decision to buy or to rent impacted by the relative costs involved: in some areas, buying is more cost-efficient than renting, while in others the decision is less clear.  It stands to reason that buying a house is not great for everyone.  There is an enormous advantage to being geographically flexible to your career and personal life as a young (or open or undecided) individual.  Taking that incredible far-away job, or taking a chance on love, is much easier when there isn’t a home weighing you down.  Of course, roots are put down regardless of whether you own or rent, and having friends and family worth staying for is wonderful.

Most Americans pay an alarming amount of interest on their mortgages.  But wait, what about the tax deductions you’re able to take?  I am mostly ignant on the details there, but I wonder if that option is falsely comforting.  Obviously the tax deduction benefits are less than the interest paid – so is this deduction doing more damage than good?  Being penny-wise but pound-foolish (cheaping out at Chipotle and forgoing the guac while paying an arm and a leg to live alone instead of with roommates) is foolish.  Every individual’s tax situation is different, and just as ‘buy a house’ can’t be great advice all around, the converse is not uniformly wise either.  However, I have to question the motives of the industry and businesses that advocate home-ownership: are they really looking out for your best interest?

Y’all, I am becoming the renaissance man I have always wanted to be – my new hobby is dissecting/critiquing conventional wisdom.  And I just sewed my first clothing item: PJ pants.  Life is sweet.

6 comments:

  1. Nominally you could say that people are paying large amount of interest on their mortgages since 3-4% APR x 20-30 years on a sizable loan is quite a lot of moolah. However that said, interest rates have been at historical lows and now is the time to get in on the action while the low-interest rate environment persist. This is even more true if you're doing short term loans <15 years. US Prime and FDTR have been staying at 3.25 and 0.25 respectively for the past 4 years and probably won't be moving anytime soon till post 2015. This is probably the lowest amount of interest you'll pay in years to come. Check out the historical mortgage rates date here:

    http://mortgage-x.com/general/historical_rates.asp

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    1. That's true, relatively-speaking, now might be a good time for some people to buy. Thanks for the comment! :)

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  2. So a bit on mortgage tax law...
    The interest on your mortgage for your primary residence *and* one other home is 100% tax deductible, up to a maximum of interest owed up to 1 million owed. This means technically, people are eligible to get 100% of this back. The catch is most people don't have that much debt, and the standard deduction is calculated assuming most people have a modest mortgage so often someone with a mortgage still doesn't have *that* much more than the standard deduction after they itemize (a requirement for the mortgage deduction). In the end, this deduction probably shouldn't be a strong motivator for the purchase decision for lower income families if they don't have many other deduction to declare. When combined with student loans interest deduction (lesser of interest paid and $2500), though, this can end up being a wonderful tax break.

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    1. Thanks for the comment!

      Well, the interest being deductible doesn't actually mean you get it all back, right? If the interest is 5K, you could deduct that from your income, but that would save you less than 5K, more like .28*5K (or whatever your marginal tax rate is), more if it bumped you to a lower bracket. You're right though, that that could add up if you itemize, with everything else. I itemized for the first time this year! And I didn't have anything major like student loan repayment, just state taxes & charity, but it was still better than the standard deduction. Who knew -- I always thought itemizing mostly just made sense if you had a mortgage.

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    2. Yea... I hate spreading misinformation and you DO NOT get back 100% of your interest, it is just tax deductible, which means you 'get back' the tax value on that amount. I wish I could edit comments here and fix the original comment.

      Also, did you modify my post? I though I had a link to the official IRA doc where I got the vast majority of my info.

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    3. If I did, it was unintentional! It looked like you left the same comment a few times, so I just approved the last one. But now I want the doc!

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