To Rent or To Buy That is the Question

I got into a bit of a twitter argument this morning over the rent or buy discussion. Specifically around the statement "it is cheaper to rent than to buy." Part of the disagreement steams from we we each defining "cheaper" differently. The self declared poor person I was arguing with seems to define "cheaper" over the time frame of one month. The person with more wealth defines cheaper differently. The question of which is cheaper is "if I choose A or B, which will make me better off in 1, 2, 5, 10 years?"

By the poor's definition of "cheaper" it is cheaper to rent. By my definition of cheaper it is cheaper to own, in most situations. (It is not cheaper to own if you live in an area/time will falling real-estate prices, or a highly volatile real-estate market. It is better to rent when you are short term in the area, or your needs will change in just a few years.)

The reason I think this is worth arguing is that I hear the comments "the poor can't afford houses" from my politically right leaning friends. The falls into the two narratives on the cause the financial/housing crisis. 1) The housing crisis was caused by policies to make it easier for the poor to buy houses. The poor can't afford to own and this caused the crisis. 2) The crisis was caused by deregulated banks taking on too much risk to make greater profits.

I would like to believe that making it easier for the poor to buy instead of rent can work, with in reasonable guidelines. The reason for that is that it is the best/easiest way to move people out of poverty, build wealth that can be passed down to future generations.

Whether it be it from putting 10 or 20% down payment, home appreciation, or simply paying off that much of the mortgage, once you have equity in the property you have a way to tap a moderately sized pool of credit at a reasonable interest rate. If the home needs repairs because the heat or A/C went out, then you can borrow at a good rate against that equity to pay for the repairs. Then repaying over the next 2 to 5 years at a rate much better than credit card, or predatory lenders. If you have enough equity, you can use it to get a loan to buy a car.

Even if one has no other assets, owning all or part of a home means having something of value to leave to children when you die. This gives the children a leg up on the ladder out of the lower classes. That is why many feel like this is the best way to fight poverty.

It is false to believe that over a reasonable time horizon that it is cheaper to rent than to own. If it were, no one would want to be a landlord. (However there are times and places where this might be true. In a housing price bubble the cost to own might be higher than renting. If apartments have been over built, but homes under built, the market might swing to renting.) The landlord will not rent for less than their cost, unless forced to by weird economic conditions and policies. To do so means they are losing money/wealth, and no one likes that. In normal conditions the landlord is trying to charge at least enough to pay his/her loan on the property, taxes and insurance, to fund savings for future repairs, and make a profit on top of all of that. The difference between the cost to rent and cost to own is the landlord's profit (or loss). A smart landlord is not raising the rent next year to pay for a repair this year; they have been setting aside money above and beyond their costs all along knowing future expenses will come.

All that said, I understand that if you can't save, inherit, or win the money for a down payment, that all of this is a moot point. If you don't have the down payment you "can't afford" to buy, but that doesn't make renting cheaper.

Main Stream Media Rumor Reporting

While I am disgusted with the actions of the Connecticut shooter yesterday. I am also frustrated and angry with the media for its response. I remember a time when I went to main stream media for news, yesterday main stream media showed it is truly a rumor mill.

I first read a headline about the shooting mid-morning. I didn't read the article just the headline of a shooter at an elementary school. A friend mentioned children were confirmed dead over lunch, so I took and other look at the news to find a jumble of conflicting information. Again I ignored the news until late afternoon. Then I devoured 3 or 4 articles to find a long list of bad reporting that had occurred through out the day.

One article contradicted itself saying the shooter killed his mother at home and then went to the school and killed his mother. An early report said the shooter was the father of a child at the school. Then there was the confusion over the name of the shooter and the number of shooters. Were their two shooters, which brother was the shooter, etc. etc.

Even this morning I am reading a single article from the Associated Press that says in one paragraph that the rifle was left in the car, and then later says the rifle was taken into the school. This tells me that 24 hours later, the Associated Press hasn't bothered to fact check the article or even edit it for consistency. Not only is twitter and face book full of rumors, but so is the main stream media.

What I want from the press are the facts, as they are known. Not passing rumors along as fast as they can be typed up. Be honest about what you know and what isn't known. And finally watch this video from 2009 that Jay Rosen commented on last July about the problems with how the news report these events. Jay Rosen's Post and a direct link to the video on Youtube. It contains some strong language.

Now go hug your loved ones.

License Aggreement and User Experiance

To companies that use licensing agreements with their consumer customers:
Do you and the lawyers that write these agreements realize that the first instinct of customers when presented with this agreements is that you are trying to take away their rights?
Do you realize that if you include a forced arbitration clause that it says "We are so confident in our incompetence that we wish to prevent ourselves from being legally responsible for our actions."?

These agreements leave the customer with a negative impression of the company and after seeing one they are looking for an excuse to hate the brand. 

Conservative High Yield Stocks

Bank accounts, are paying less than 1% interest these days and that is if you are very lucky. I have one account paying 0.01% interest. Recently my parents were recently looking for a relatively safe investment recently. So I suggested a portfolio of high dividend stocks that was a subset of the following list and average yield of just over 5%.

The obvious advantage of bank accounts is their safety. You can get a FDIC insured account and not stay up nights worrying about your money. While dividend paying stocks don't have that advantage, they have different risks and advantages. The risk is that the stock will go down in value causing you to lose some of your principle. The advantages are 1) the stock price could go up growing your investment; 2) some stocks pay a much higher dividend rate than the interest on bank accounts; 3) until the Bush tax cuts go away, the tax rate on dividends is ridiculously low (interest on a bank account is taxed as income).

If you are in the lowest tax bracket, taxes on investing are VERY low. If you are retired with low income this becomes a huge advantage of investing in dividend paying stocks. Hence the reason I recommended some of the following to my parents.

Pitney Bowes (PBI) - Current yield is 6%. There is risk to this stock as more and more physical mail goes away. But the pounds of mail I get from my PO Box every time I check shows mail is still very much with us.

Telefonos de Mexico (TMX) - Current yield 4.8%. This company is probably best known for making Carlos Slim one of the richest people in the world.

Duke Energy Corporation (DUK) - Current yield of 5.1%. I would have expected DUK to dip during the nuclear fear after the Japanese earthquake and problems at Fukushima. But Duke's stock price didn't faultier.

GlaxoSmithKline (GSK) - Current yield 4.8%. Large drug companies are facing problems. But their dividends should be safe for a few more years, and GSK has one of the highest pay outs.

Verizon Communications Inc. (VZ) - Current yield 5.2%. Long term I expect this industry to face disruptive forces that make it into more of a utility selling bits. But like the drug companies they have a few more years of life in them. You could interchange Verizon or AT&T (yield of 5.5%) in this spot.

Taiwan Semiconductor Manufactur (TSM) - Current yield 2.7%. TSM's current dividend yield is much below the others, but it does give equity exposure to the tech industry and to south east Asian foreign stocks.

For my parents we picked 4 of these stocks weighted to provide a near 5% yield and diversification across companies and industries. Note that three of the six are international stocks; although half of GSK's operations and more than half their revenue are from the US.

Risk Assessment

Three things stand out in my mind showing that as a species we are very bad at estimating risk in the modern world.

Credit agencies proved to be very bad at assessing the risk of CDOs, if they were trying at all. This ended up starting the financial panic and leading to the recession. Worst case scenarios tend to get discredited. In any given period of time they might be "unlikely" to happen, but that doesn't mean they are impossible. Yes it was possible for entire swaths of the real estate market to see large value declines.

Then we come to the Deepwater Horizon oil spill. Oil companies had assured the government they had plans for worst case scenarios. Their worst case, just wasn't as bad as what reality had in store for them. The industry took risks that lead to the accident, and then once it had occurred, it was clear there was no plan to deal with the resulting damage to the oil wellhead.

This brings us to the Fukushima nuclear plant problems. At the current time it appears that a major nuclear disaster has been averted. However the cause of the problem was underestimating the maximum intensity of an earthquake affecting the area, and the size of the resulting tsunami. The knocking out of backup generators by the tsunami did more damage than the earthquake, at least in terms of limiting the ability of plant workers to cool the rods and waste pools.

As I think about this issue I could name many other examples, but these are easily the ones that have received the most press in recent years.

For our civilization to survive we need to find ways of being better at this. One thing we must also learn to do is balance the chance that something goes wrong with the level of damage caused if it does. We are not capable of this naturally, it is something that we will have to work at.

Fear of Inflation

Again as the price of oil goes up, and the price of all things that depend on it climb as well, I see politicians and central bankers crying out about inflation. At the moment there is little need for inflation controls outside of a handful of developing economies (for instance China).

Yes the price of oil is going up. But this time almost everyone agrees the reason is temporary in the long term. Yes this drives up the costs of transportation and many commodities. But what inflation hawks don't seem to take into account is that by diverting more capital to fuel costs the rise in oil prices already acts as a brake on the economy. Companies and people alike will have to adjust their budgets to deal with the rise in fuel costs, and that will slow demand on other resources cooling the economy. The market will handle this.

I am glad to see that at least Bernanke agrees. This is not the time to apply panic braking to the economy in the developed world. Raising interest rates at the moment would be like pulling the emergency break on the economy.

Good News for the Economy?

Given that the stock market is generally considered a leading indicator of the economy. I feel the economy is about to take off. While the press wants to debate the possibility of a double dip recession, the stock market has been having nothing of it recently.

I came to this conclusion because I was looking for a good time to buy MSB stock. MSB is Mesabi Trust, which is an iron ore trust. This basically means investing in it is betting that the price of iron will either stay steady (if you want the dividend) or go up (for capital appreciation). Normally this stock goes down on bad economic news and up on good news. A little over a month ago it stopped reacting to bad news. Since the beginning of august the stock has gone from $24/share to a peak of $34/share yesterday. Even with today's 10% drop to $30.30, that is a good run for a commodity stock. Other stocks (like Apple) have been doing well through September. If this trend continues into November, then I think we will have a great spring in 2011.