Interesting Tidbits – Page 14

A Tax on the Castle

This morning I picked up the newspaper and was just
shocked to see this quote in oversized letters on the front
page:

“I am a senior and I
am on retirement (income) and Social Security, and I thought that homes, as they
got older, usually went down (in taxable
value).”

I was flabbergasted! Has
this person not noticed housing prices going up both in her neighborhood and the
nation at large, with talk of a potential housing bubble? Has she not noticed the assessment
notices from the county each year? Can she possibly not be aware that housing
prices and tax assessments have at least some passing relationship? Have we not
been told since we were old enough to pay attention that a house is not merely a dwelling, not only our
castle, it is an investment, a cornerstone of our financial
planning, a colossal tax break, and the most important asset most of us are
likely to ever possess?

A related story on the front page tells us that in
the last year “the average value of resale homes jumped an unprecedented 10
percent.” This rise is not typical, but it’s still impressive. That’s pretty
darn good in an environment where the long bond is earning less than 5% and the S&P 500 has risen about 7% in the last year.
Housing has been a bright spot in a dull economy
in many parts of the country.

Even
considering this performance, I am of the opinion that a primary home is not
always
an asset and not always a good investment. I am furthermore not alone in this
opinion. The issue of whether your home is an
asset or a liability depends on many factors, some of which are unique to your
situation. Here are some issues you should consider when deciding where the
family home fits in the family
finances.

What are you
really paying? No, not just the accepted
offer price, the amount of money you
will pay over the term of your mortgage. If you take a 30 year
mortgage, even a low interest rate like 5.5% will leave you paying twice the
mortgage amount. Do you really think your house will be worth twice your
purchase price when the mortgage is paid off? Be honest. Before you start
shouting that all the interest you pay is all tax deductible, you should know
that is only completely true if you are not subject to AMT. Furthermore, your deduction will only save
you the amount of interest you paid times
your tax rate. Paying $12,000 and in the 28%
tax bracket? Your $12000 expense will only save you $3360. A mere $280 per
month. I certainly would not buy a bigger house just for a bigger tax
break.

Have you considered
the incidental expenses? Incidental expenses
include a raft of bills and hassles that come with homeownership. Many of these
things apartment dwellers only pay in an incremental, pass-through fashion
instead of a big bill. The list includes all maintenance, such as repairing
roofs, painting, replacing carpet and appliances, mucking out gutters, mowing
the lawn, keeping the water softener full of salt, checking the air
conditioning, and keeping the common areas clean. The list also includes
non-maintenance items such as property taxes, homeowner association dues,
utility bills, and even helping resolve problems with the
neighbors.

How does buying a
house compare to the alternatives? If the
cost of renting the size dwelling you need is comparable to the cost of buying
in your area once you have considered incidental expenses, then buying is
probably the way to go. When this even close to the case, the mortgage interest
deduction actually does some good. Furthermore, equity is a pretty good thing.
However, don’t make yourself “house-poor,” don’t justify spending a lot more
each month to get the equity and the deduction, don’t tell yourself the house
surely will go up in value unless you have looked at the facts. Be sure to take
into account special situations, such as knowing you are going to get a job
transfer or wanting to be in a particular school district.

How important is
liquidity? A house is a tough asset when it
comes to using your equity. There are really only two ways to get money out of
your primary residence: mortgage it (again) or sell it. If you mortgage it, you
have another bill and are paying more interest — depending on your equity level
and your tax status, it might not even be the deductible kind. Furthermore,
mortgage paperwork is time consuming, and there will be closing fees associated
with the new mortgage. If you sell it, you have to find a new place to live.
That is an expensive pain in the butt. If you think you may need to lay hands on
your money in a hurry, a house is not the best place to
invest.

Is this particular
house a good investment? Is it reasonable to
think it will go up in value? How is the neighborhood doing: improving or
declining or maybe just stable? Are people in the neighborhood families planning
to stay around, or transient executives, or older people planning on moving to a
more retirement friendly area? Is the house or the neighborhood historical?
Are there some obvious improvements you could make that will increase the
house’s value? Are there tax implications beyond mortgage income deductions and
property taxes? Do not forget to consider your timeframe. Planning to live in a
house 5 years is different from planning to live in a house 20 years. Don’t
forget any value you may extract simply by living there and enjoying it. On the
other hand, do not overvalue that experience.

I am not saying you shouldn’t buy a
house. I am saying you should consider whether it is really in your best
interests to do so.

“Let your Light so shine before men”

Yesterday’s news includes the footnote that a church in Milford, Connecticut is buying out an adult movie store. The congregation raised $245,000 to do it. Almost a quarter of a million dollars. What else could they have done with that money?

They could have given 16 people full time jobs at minimum wage with benefits. Alternatively, they could have hired 8 people at a salary of $30,000 per year. They could have “adopted” a dozen needly families, and helped them with everything their meager earnings would not cover.

They could have fed 150 homeless people a meal, each and every day of the year. They could have paid a years rent at $500 per month on 40 apartments to help homeless families transition out of shelters. They could have bought and distributed over 11000 Bibles. They could have purchased over 3600 winter coats for needy people.

They could have given full scholarships to 29 underprivileged children to attend the Academy of Our Lady of Mercy – Lauralton Hall in Milford. They could send 78 children to private schools with the Cato Institute’s average tuition of $3116.

They could have bought a years supply of birth control pills for 510 impoverished married women, preventinggod-alone-knows how many abortions, and helping poor families keep from becoming even poorer by allowing them to control the size of their families.

They could have purchased 22 Toyota Echos and replaced an equal number of old junkers that were unreliable, got lousy milage, and polluted “God’s Creation” more than new cars.

They could have sent 70 letters to each of the 3500 people on Death Row in the entire United States, or 12 letters to each and every one of the over 19,000 people in Connecticut prisons. They could have sent a $10 “get well” gift after each of Yale-New Haven Hospital’s annual 22,000 surgical operations.

They could have taken over 40,000 people to see a movie.

The really ironic part of this entire saga is that it will not put the former owner out of business at all. Could they really honestly have thought he would say to himself “Oh well, no more adult entertainment business for me. I think I’ll become a laundromat attendant”? No, he’ll use that money to rebuild, and have a new bigger place of business in a couple of months. Maybe just down the street! If the church got a non-compete clause in the sale, he will set up as close as is allowed, or get a court to set the agreement aside. His former customers will visit his new business, but his employees may not be so lucky, depending on their available transportation.

The only thing they have truly accomplished is knowing there’s no adult entertainment nearby — Not In My Back Yard. At least for today.

Do You Beleive in Little Things?

Today’s science news includes the idea that scientists have created stain-free pants! I confess, my knee-jerk reaction to this news was “Wake me when they are sold at Mervyn’s for less than $100 a pair.” To my great surprise you can actually purchase them at Eddie Bauer, for a mere $10 premium. The company claims they have sold well since their introduction in 2001 — begging the question of why this is in today’s news. Shirts of similarly treated fabric are supposedly available, with jackets to follow this fall. This is clearly a boon to those who still have a propensity towards spilling things on themselves, usually at inopportune moments, such as right before a job interview.

Strictly speaking, nanotechnology is nothing more than the science of making things that are very small. Things like better skin lotions, batteries that last longer, or anti-stain coatings for fabric. The public idea of nanotech, however, includes such “flying car” ideas as microscopic robots that cure disease, and cars that can repair themselves. Nanotech is seen as “revolutionizing” everything from medical products to environmental cleanup to crime prevention. Even the government wants in on this act.

Intelligent people who you may or may not agree with, like Steve Forbes and Joe Lieberman, say this is such a clearly up and coming field that people should invest in it. Not just as individuals, but as corporations and venture capitalists and governments. They cite figures saying that it could be a $1 Trillion business in 15 years.

Others say this is a dangerous trend, which should be closely monitored, lest there be horrible unforeseen results. This is particularly true of military applications of nanotech. It does not take a tin-foil hat to see the possibility that weapons using the technology of the very small — say, pocket sized nuclear devices, or listening devices no larger than a flea, or even weapons-resistant coatings for tanks and aircraft — could be very dangerous in the “wrong” hands.

Still others think nanotech a tempest in a teapot, perhaps interesting, but not paradigm shifting. Sure, nanotech is interesting, but is it cost effective? Can it ever live up to its promises? Remember that not long ago, everyone was convinced that the Internet would change everyone’s lives in unimaginable ways. When all is said and done, the biggest change for most of us is the ability to find a startling amount of information without leaving home, and without living in a research library. The nay-sayers have a half-century of “world of tomorrow” exhibits to point to as they say that things rarely turn out exactly as planned.

I think I’d be very careful about investing in nanotech. Investors might be better off waiting for 3M and DuPont to buy out the small companies with actual viable products. In the meantime, I think I’ll see if those Eddie Bauer pants come in a 26″ inseam.

So, Where is there a 5 Star Restaurant in Omaha?

One lucky soul had the winning eBay bid of $250,000. The money goes to charity, the bidder goes to lunch. This is no ordinary lunch, of course, but lunch with the second richest man in the world, Warren Buffett.
Buffett is a legendary investor, and Chairman of Berkshire-Hathaway. Perhaps more remarkable regarding his reputation as an investor is the fact that he shuns technology stocks, claiming he does not understand them well enough to invest in them. One can imagine that his friend, the man who nudged Buffett aside from the position of richest man in the world, Bill Gates might be persuaded to tutor him in this regard.

Berkshire-Hathaway, by the way, is a rather legendary company in its own right. They are a holding company, whose subsidiaries are mostly but not exclusively insurance companies. The two subsidiaries you are most likely to have heard of are GEICO and Dairy Queen. At this writing, it will cost you over $70K to buy a single class “A” share of Berksire-Hathaway. There is no dividend. The company paid Buffett a salary of $294K in 2002. That’s not much more than the cost of this little luncheon.

As with many men of wealth beyond being able to spend it, he is also a bit of a philanthropist. Previous charity lunches, held in San Francisco and not auctioned on eBay, went for $25-32K. These lunches have gone from the price of a nice car to the price of a nice 4 bedroom house in many areas of the country. The winner does get to bring 7 companions, bringing the price per plate down to $31,250 — assuming the actual food is included in the price tag.

I sincerely hope the winner is doing this because he or she wishes to help the charity beneficiary, and not thinking to pick up a quarter million dollar stock tip.

A missive from the Department of Making Researchers Look Busy

Some researchers have done a study which finds anyone can be a boss! What a lovely thought. This kind of thinking is what gets us Pointy Haired Bosses. Seriously, I bet you can think of a dozen people who shouldn’t be be able to delegate anything more critical than making sure the plants are watered. Yet according to university level research, these people can be a boss.

Of course what they mean to say is that anyone can be bossy and make arbitrary decisions — some might even make surprisingly good decisions. Furthermore, this “research” found that “unwilling subordinates” tended to try and be the boss in any event. Theoretically I suppose this means it is better to put the naturally bossy in charge ofsomething, anything, even if it’s those pesky plants, as long as it gets them out of the important stuff. This does however, support the writings of people like Tom Peters, whose employee empowerment theories include the idea that if you allow all employees some latitude in their decision making, they will rise to the occasion, make mostly decent decisions, and make your customers happier by not having to refer to a manager or a rule-book.

Even the researchers admit “We didn’t actually measure the quality of the performance.” Perhaps they are saving that for the next grant proposal.