Lots of goodies on the Internet this morning. I'll post a pile of links and then decide later what deserves more attention.
More discussion about the Duke study that found that access to the Internet lowers test scores. Apparently, this finding also holds for low-income kids. I've got to read that whole study.
Great column by Ross Douthat ranting about last week’s news that Americans with million-dollar mortgages are defaulting at almost twice the rate of the typical homeowner."But conservatives need to recognize that the most pernicious sort of
redistribution isn’t from the successful to the poor. It’s from savers
to speculators, from outsiders to insiders, and from the industrious
middle class to the reckless, unproductive rich."
More on the Jezebel/Daily Show showdown.
"The tenure system of academia is uniquely incompatible with the
biological clocks of working women, according to a new study, one of
the first to examine the persistent "leak" of talented women from the
pipeline that produces professors" No joke!
Apt. 11d 
I think Douthat is one to something there. What’s more, I think the savers and the outsiders know it and that is why you have so much resistance to stimulus. After the bailout and portions of the stimulus that only went to spenders (house buying incentive, cash for clunkers, etc.) the savers aren’t listening to any argument for more stimulus (or any public borrowing).
LikeLike
Douthat gets one out of three “from outsiders to insiders”, which is better than his usual rate but still a failing grade.
LikeLike
Come on. Douthat nailed the “savers to speculators.” I’m not saying monetary policy should be that different, but a side effect of all of this is that there is no longer any way to earn a return on savings without speculating.
If you decide to make due with a 15 year old car when you have enough cash for a new one, you get to take the money and earn $49.12 in interest. If you drove a 15 year old Expedition, the government gave you thousands so you could borrow for a new car without bothering to saved enough to make a downpayment. If you tried to save to buy a house, the government helped speculators outbid you by making it easier to borrow without much of a down payment (which is why the $8,500 tax credit was able to boost house prices by more than $8,500). This is especially alarming since it is clear that down payments are actually as important as a credit score when it comes to getting paid back.
LikeLike
A million dollar mortgage isn’t all that. Back in the day (2006?), a mortgage broker in the DC area approved us for $615k, which is roughly three times as much as we could dream of carrying, ever.
To see what $1 million gets you, I encourage you to go play the Crack Shack or Mansion game, which lets you play along at home with the Vancouver real estate market (dollars presumably in Canadian):
http://www.crackshackormansion.com/original.html
LikeLike
Amy P, Vancouver’s about as realistic a real estate market as other crazy areas at the height of the speculation. Still, it’s more difficult to qualify for a mortgage in Canada. That, combined with tighter financial regulation means that the speculation hasn’t run as rampant here as in the states (and in February, the federal government even cracked down more on the possibility).
Douthat’s condemnation of the way in which the mortgage interest deduction functions sounds pretty spot-on. Of course, we don’t have mortgage interest deductions here in Canada!
And Laura? Thanks for the link to the WP article. It’s a thoughtful take on the problems of academe for women although just the tip of the iceberg.
LikeLike
I like Megan McArdle’s take on defaulters a lot better:
http://www.theatlantic.com/business/archive/2010/07/are-the-rich-really-more-likely-to-walk-away-from-their-mortgages/59548/
Although one does run into strategic defaulters in housing reportage, much more common are the people who just plain can’t afford the mortgages. The NYT’s and Douthat’s confusion (that people with expensive homes are automatically “rich people”) is part of what got us into this whole mess to begin with.
I haven’t read the articles themselves, but there’s an important distinction between recourse and non-recourse states for foreclosures. In non-recourse states, the return of the house ends the former homeowner’s financial ties to the lender. However, in recourse states, the lender can pursue the borrower if the sale price of the foreclosed home doesn’t cover the mortgage. If you’re really truly broke, it doesn’t matter, since you can declare bankruptcy. But if you have substantial assets (beyond retirement accounts) and live in a recourse state, you’ll spend the rest of you life looking over your shoulder.
LikeLike
This is academic narcissism. Tenure track is not uniquely hostile to women and fertility – law, accounting firms are as bad. Medical residencies are dreadful.
LikeLike
“Still, it’s more difficult to qualify for a mortgage in Canada. That, combined with tighter financial regulation means that the speculation hasn’t run as rampant here as in the states (and in February, the federal government even cracked down more on the possibility).”
I keep hearing how strict the Canadians are about lending, but the whole Vancouver/Lower Mainland situation makes me very doubtful. I’ve been trying to get some people I know in the area to sell while there’s still time, but 1) either the market is bad and the house is underwater and they can’t sell or 2) the market is doing great, so they don’t want to sell. I expect they’ll lose at least a million Canadian dollars in paper equity before this thing is over. Despite what people say about the strictness of Canadian lending, it has been possible to “creatively” get way over your head.
Here’s a Vancouver housing bubble blog: http://vancouvercondo.info/
One significant difference in mortgage lending in the US and Canada is that there doesn’t seem to be an analog to the US’s traditional 30-year fixed rate mortgage in Canada. At least as far as I can tell from some limited googling, 10 years is the maximum term for a Canadian fixed rate loan. That creates the possibility of a lot of volatility in the Canadian housing market. Americans (if they’re smart) can freeze their housing costs and just keep paying a mortgage that gets less and less difficult to carry as inflation does its dirty work. (That said, I think 30 years is way too long to pay for anything.)
http://en.wikipedia.org/wiki/Fixed_rate_mortgage
LikeLike
Ross Douthat once again falls into the fallacy of writing, “The Republicans are trying to do X, but are inadvertently doing Y!” — ignoring the fact that Republicans are doing Y because they want to do Y, and would vote down any attempt to do X.
It’s almost as if when he writes about “Republicans,” he means a different political party than the one I regularly fail to vote for.
LikeLike
(That said, I think 30 years is way too long to pay for anything.)
Why? If you rented, you’d pay for 30 years and have nothing to show for it (plus, you’d have to deal with annual rent increases). Thirty years might be a long time, but it’s not “longer” than the alternative.
LikeLike
Ross Douthat once again falls into the fallacy of writing, “The Republicans are trying to do X, but are inadvertently doing Y!” — ignoring the fact that Republicans are doing Y because they want to do Y, and would vote down any attempt to do X.
Did you read that article? There is not the slightest indication that he thinks anybody (Republican or Democrat) is inadvertently supporting the policies he criticized. The article isn’t very partisan and the closest it comes to what you mention is, “Many Republican senators have been staunch critics of corporate welfare,” which is hardly the same as saying the Republican Party has inadvertently supported corporate welfare.
I’m sure there is lots in the article that you find objectionable (like means testing entitlements for elderly). However, Bush expanded Medicare greatly and the Reps in Congress have been attacking Health Care Reform by trying to scare the wealthier elderly into reading HCR as a threat to their nice subsidy. Douthat is hardly carrying water for the Republicans on this.
LikeLike
But McArdle is talking about the implied (but not data driven) assumption in the NYT that rich owners are walking away from their mortgages because she believes that’s “wrong”, even in no-recourse states. In non-recourse states (I believe NY isn’t one, but CA & WA are), a rich person can walk away from their house and keep their other assets. It’s pretty much the only sensible thing to do, unless you have equity in your house, or think you will (for example, when the housing market recovers).
So, if owning a million dollar house doesn’t make you a “rich” person, what does?
LikeLike
“So, if owning a million dollar house doesn’t make you a “rich” person, what does?”
If you can’t pay the mortgage, you don’t own the house. The bank does. If you can’t sell the house quickly, it’s a net liability, not an asset, no matter what you think its current or future value might be.
Megan McArdle’s making the point that in some areas of the country, people who were not rich bought “million dollar” houses. The over-leveraged are more likely to default, and they are defaulting. That doesn’t mean the over-leveraged are “rich.” It means they took on too much debt. It doesn’t mean that they ever had a reasonable chance of paying off the mortgage (although the NYT writer assumes they did.)
LikeLike
I find it really hard to believe that non-rich people bought million-dollar houses. I guess that we’ll have to quibble over the definition of “rich.” Is $250K/year rich? Is $150K/year rich?
LikeLike
“Rich” is usually taken to mean “having wealth.” Wealth is a stock, income is a flow. They are two different things, which is part of what Douthat’s spender/savers split was getting at. Nobody will feel that sorry for you, but it is pretty easy to earn $250k/year and spending $251k/year. It was also possible, thanks to lower lending standards during the boom, to borrow to the point where if your income went from $250k to $200k, you’d become insolvement.
LikeLike
“Megan McArdle’s making the point that in some areas of the country, people who were not rich bought “million dollar” houses.”
Obviously, this is only a meaningful statement if you have a definition of “rich”. If we define the rich as people who bought million dollar houses, the statement would have to be false. The NY times makes the implicit assumption that having been permitted to buy a million dollar house means that you’re “rich.”
Alternatively you could define rich as someone who isn’t having their million dollar home foreclosed, in which case, obviously, no rich people would be defaulting on their homes. I found MM’s rhetoric to venture into that territory, though I think, mostly, she was just trying to make the point that the NY times hadn’t provided any evidence that the defaulters were “rich” except the tautological definition.
I think for the purpose of the NY times article, the way we want to interpret it, rich should be defined as having assets outside of the value of your house. In a non-recourse state (like CA or WA) you could walk away from a million dollar mortgage (if you thought the house was worth much less than that, and unlikely to recover its value) even if you had gazillions of dollars in other assets. And, in fact, it would be easier for you to do, than for a mere mortal, since your need to borrow (which would be impacted by jingle mail) would be less.
LikeLike
“I find it really hard to believe that non-rich people bought million-dollar houses. I guess that we’ll have to quibble over the definition of “rich.” Is $250K/year rich? Is $150K/year rich?”
In a lot of coastal areas, the price of homes was running at around 5X income, with gusts up to 10X (for example in Vancouver and the Bay Area). When that mortgage broker in DC tried to get us to go for an interest only (!!!) loan for $615k, that was around 8 or 9 times our gross yearly income.
I agree with Cranberry about ownership–you don’t own the house until it’s paid off.
I’ll try to drop in later to answer La Lubu. Math is hard (and I never learned this kind), so I’ll be using the NYT rent-to-buy calculator.
LikeLike
The NY times rent v buy calculator is nice. My rule of thumb for this calc is that you have to plug in your own numbers for the house you want to rent v the house you want to buy. People like to give rules of thumb of the top of their head, but they’re flawed.
I’d add the one caveat that governed our main decision to buy, though. You simply can’t rent the house we bought.
Now, if you don’t own the house until it’s paid off, do you own it if you have the money to pay it off, but you think it doesn’t make economic sense to do so?
Also, one of the things about houses (and I think this is important factor for “rich” people) is that they cost money to own. Most other assets can end up being zero value (short selling, venture capitol commitments, and mutual funds with unrealized but taxable gains being a counter example). But houses cost hefty amounts of money to own, in maintenance & taxes.
LikeLike
“When that mortgage broker in DC tried to get us to go for an interest only (!!!) loan for $615k, that was around 8 or 9 times our gross yearly income. ”
That’s just so wrong. The only way that would be reasonable is if someone had a guaranteed trust that was tied up until they were 25 or something like that. Insane.
LikeLike
“The NY times makes the implicit assumption that having been permitted to buy a million dollar house means that you’re “rich.””
At the peak of the bubble, just before the crash, “liar” loans, i.e., no-doc loans where income was not verified, abounded. It was reportedly possible to finance 100% of the purchase price, although you might have to take out 2 mortgages to do it. Even with the old-fashioned, conservative, 20% down on a mortgage would have left the borrower with $800,000 to cover over the next 30 years.
I think a certain number of non-fraudulent borrowers were trying to stretch for the house in the Good School District. They didn’t necessarily intend to live in a house for 30 years, thus paying off the mortgage. They intended to live in the house for 12 years, say, until the 6 year old finished high school, then to sell the (undoubtedly much appreciated!!) house to pay college tuition.
While that model wouldn’t have worked if you had had the ill fortune to buy in 2005, it did work for many people who entered the market earlier. We sold a house more than a decade ago. Its Zestimate now (still) is twice its sale price more than a decade ago. It’s less than a million, but the appreciation on the house could easily cover tuition.
LikeLike
NYT rent-to-buy calculator? Heh. I didn’t need anything that fancy. Living in the Rust Belt means cheap housing. Cheaper, literally, than renting. When I bought my house in 1994, my mortgage payment was lower than the rent at my previous address. That building met the wrecking ball several years ago, but similar apartments are renting for approximately twice what my mortgage payment is, now that fifteen years have passed.
I would have bought sooner, but coming up with the down payment was the barrier—that took time.
LikeLike
” Cheaper, literally, than renting. When I bought my house in 1994, my mortgage payment was lower than the rent at my previous address”
Yes, a phenomenon that can exist at rust belt places (as well as, occasionally, at high renter population places, like college towns, if you’re willing to live far from the college).
But there were plenty of places where rents were substantially less than mortgage payments. Then, you really need the calculator to figure out whether it makes sense, and to knock some sense into when it doesn’t. Unfortunately, a lot of people look at people who’ve gotten 10-15% gains and think hat they just can’t give up the upside, and take on far more risk than they should.
I haven’t read Douthat, but I do think that we’re shifting to a world with no safety, where rewards depends on taking speculative risk, and that we haven’t properly figured out how we’re going to govern a land where people are incentivized to take on tremendous risk, far more than most people can handle. I’m fearful that we’re building a nation of gamblers and losers, and no slow and steady turtles.
LikeLike
“I think a certain number of non-fraudulent borrowers were trying to stretch for the house in the Good School District. They didn’t necessarily intend to live in a house for 30 years, thus paying off the mortgage. They intended to live in the house for 12 years, say, until the 6 year old finished high school, then to sell the (undoubtedly much appreciated!!) house to pay college tuition.”
Yeah. I think that was the mindset. Also, a lot of people in our area got in trouble, because of bonuses. Their base salary was relatively modest, but they made four times that with their bonuses. They were very specifically told that there might be years when they had a level bonus, but their bonus would never go down. Well, that didn’t turn out to be the case.
I’m not sure that people are going to take risks like they did ten years ago. But, you know, home prices are going back up. Our neighbor just sold his house in two days for asking cost and is kicking himself for not asking for more.
LikeLike
me: (That said, I think 30 years is way too long to pay for anything.)
La Lubu: Why? If you rented, you’d pay for 30 years and have nothing to show for it (plus, you’d have to deal with annual rent increases). Thirty years might be a long time, but it’s not “longer” than the alternative.
1. At least short-term, rent doesn’t go inexorably up and up. I keep hearing reports of renters who (because of the general economic climate) have been able to either negotiate down rents or put the kibosh on rent increases.
2. Under unfavorable circumstances, you can buy a house, pay the mortgage, taxes, and maintenance for 30 years and have nothing to show for it. That is the beautiful thing about the NYT rent-buy calculator. I’ll give my personal homebuying calculations. I’ll set monthly rent at $1,000 a month, downpayment at 10%, mortgage interest at 5%, property tax at 2%, yearly rent increase at 3% and yearly home appreciation at 1% (those last two require a crystal ball, but it’s the NYT default). Here are my results for the break-even points for various home prices:
$90k (“Buying is better than renting after two years”)
$110k (“Buying is better than renting after three years”)
$130k (“Buying is better than renting after four years”)
$150k (“Buying is better than renting after six years”)
$170k (“Buying is better than renting after ten years”)
$190k (“Buying is better than renting after fifteen years”)
$210k (“Buying is better than renting after twenty two years”
$230k (“Buying is better than renting after thirty years”)
$250k (“Buying is never better than renting after thirty years”–I think it actually does eventually break even, but only well after 30 years)
With my numbers, it looks like there’s the fastest break even on lower-end homes (although you have to take neighborhood decay into account). With my assumptions (which are very realistic for our area and situation) buying a home starts looking like a really bad idea around $200k.
My personal preference is for a 15-year mortgage.
LikeLike
On the other hand, if the tax rates are 1%, rents go up 1%, homes by 1%, and you’re in the 35% tax bracket, 20% down, buying beats renting in <10 years for a 250K house (and in 19, if houses don't increase in value at all). With the same scenario, but houses going up 5% (not unreasonable), you end up saving 10K+/year after you break even.
(and, the NYT assumes you get a 4% rate of return on your money when it's not in a house, which seems an unwise assumption right now)
So, I really think people have to plug in their own numbers and see if it makes sense.
(yeah, I like calculators)
LikeLike
On the other hand, if the tax rates are 1%
That’s the kind of thing that only happens in Jack Kemp’s dreams or states that don’t have huge public legacy costs. We pay 3%. Plus a 4% transfer tax, which means that you will almost certainly underestimate your closing costs if you come from somewhere reasonable.
I find that the most useful part of those type of calculators is that you have to mathematically state your assumptions. This makes it harder to delude yourself.
LikeLike
NYT rent-to-buy calculator? Heh. I didn’t need anything that fancy. Living in the Rust Belt means cheap housing. Cheaper, literally, than renting.
Yes, it is obviously cheaper to buy in some of the Rust Belt. But, you do have to worry about transaction costs. The 4% transfer tax plus the other costs of selling mean that even though it is much cheaper than renting, you really do need to be certain you aren’t moving the new few years because appreciation won’t pay those costs.
Because I am in the Rust Belt, I used to worry about all the houses going to worthless, like Detroit. Now I don’t worry about that as much since the collapse has happened in the nicer parts of the country and Florida.
LikeLike
“That’s the kind of thing that only happens in Jack Kemp’s dreams or states that don’t have huge public legacy costs.”
Or states that have income tax and/or stiff sales tax.
LikeLike
Or states that have income tax and/or stiff sales tax.
I pay 4% state income tax, 3% local wage tax*, and 7% sales tax. Plus, seriously over-priced alcohol. Pittsburgh is what keeps me from becoming a Democrat after Bush did the bailout.
*For someone in our situation (house, kid, church), this is worse than income tax because it is 3% of wages with no deductions.
LikeLike
Pittsburgh is what keeps me from becoming a Democrat after Bush did the bailout.
At least as far as economic policy goes.
LikeLike
1% is the property tax – ours is around that, annually. My scenario is pretty reasonable, and a higher income tax skews in favor of buying, if interest is deductible.
And in a non recourse state, you can walk away if the houses become worthless, capping your loss to time served and the down payment.
Hmh, now I’m wondering if I should buy some more property.
LikeLike
Our property taxes are about 1% here in Taxachusetts. State income tax is 5.3% and the sales tax is 6.25%.
LikeLike
Hmh, now I’m wondering if I should buy some more property.
I’ve thought about trying to be a landlord, but decided I don’t want the trouble for that kind of money. You can buy for less than you can rent, but the difference between the two isn’t very great in my neighborhood. The profit is not enough to compensate for the risk and effort. You have to go to the cheaper neighborhoods before you get a good profit, as rents do not drop as fast as prices. But then you have to deal with Section 8 and more crime and the like.
LikeLike
Our property taxes are about 1% here in Taxachusetts. State income tax is 5.3% and the sales tax is 6.25%.
Our 3% property taxes (which go as high as 6% in some really poorly run areas) is probably why assessing property values is something that does not happen without a court order. For a county official, revaluation is as dangerous smoking crack while sitting in a bucket of gasoline.
LikeLike
we have an incomprehensible scheme where you property valuations don’t change the tax you owe unless your house changes in value with respect to others. I don’t really understand it, except that I know it means my taxes never go down.
LikeLike
Is that house still worth $1 million? In the towns in our immediate area, many houses are listed for sale. Not many are selling, and those that houses are selling are listed for less than $1 million.
IF people who own expensive houses are more likely to default on their mortgages, perhaps they are realistic about how difficult it would be to sell their homes for enough money to cover the mortgage(s).
I also remember a newspaper article before the bust, which praised the wealthy for speculating in the stock market with money gained by mortgaging their houses. They were “putting their money to work.” I wonder how many of those geniuses ended up regretting that decision.
LikeLike
“I also remember a newspaper article before the bust, which praised the wealthy for speculating in the stock market with money gained by mortgaging their houses.”
Yeah, you used to hear a lot about how it’s not “sophisticated” to have a whole bunch of equity sitting there doing nothing. The other version of this was to borrow against your home to build a rental mini-empire (generally with rents that just barely made the mortgage, if that).
Of course, these days, a 5% guaranteed return (from paying off a mortgage) sounds swell. We have a money market account that started out with a healthy interest rate a year or two ago, but I see from our last statement that the thing is now paying .95% in yearly interest. I wonder how low it’s going to go. (We need the money in about a year, so we’re not chasing returns right now.)
LikeLike