> ...Even when homeowners got hopelessly behind on
> their mortgages, two options helped. First, they
> could declare bankruptcy and free themselves of
> their crippling debt;

Great premise for a sci fi - person defaults on student loan and repo men wipe his education from his brain.

Finally, someone else making this argument! I have maintained that government is only working towards 'issuing' the markers of success: getting people into homes, giving 'middle-class jobs' by greatly expanding the government dole, and making sure everyone goes to college.

I remember a story (and study) from years ago about how wasteful and filled with these make-work jobs the government was. In short, they way overpay the lowest trained/educated workers and underpay the highest trained/educated workers (compared to civilian compensation). The arguments were predictable but when it was obvious the debate had been lost the pro-government side could only retort how they gave all these minimally educated people jobs and made them middle class (as well as a mild accusation of being racist).

Even the New York Times is now willing to admit that the causes of rising tuition are not cuts in education spending by states.

http://www.nytimes.com/2015/04/05/opinion/sunday/the-real-reason-college-tuition-costs-so-much.html?_r=0

EXCERPTED:

ONCE upon a time in America, baby boomers paid for college with the money they made from their summer jobs. Then, over the course of the next few decades, public funding for higher education was slashed. These radical cuts forced universities to raise tuition year after year, which in turn forced the millennial generation to take on crushing educational debt loads, and everyone lived unhappily ever after.

This is the story college administrators like to tell when they’re asked to explain why, over the past 35 years, college tuition at public universities has nearly quadrupled, to $9,139 in 2014 dollars. It is a fairy tale in the worst sense, in that it is not merely false, but rather almost the inverse of the truth.

The conventional wisdom was reflected in a recent National Public Radio series on the cost of college. “So it’s not that colleges are spending more money to educate students,” Sandy Baum of the Urban Institute told NPR. “It’s that they have to get that money from someplace to replace their lost state funding — and that’s from tuition and fees from students and families.”

In fact, public investment in higher education in America is vastly larger today, in inflation-adjusted dollars, than it was during the supposed golden age of public funding in the 1960s. Such spending has increased at a much faster rate than government spending in general. For example, the military’s budget is about 1.8 times higher today than it was in 1960, while legislative appropriations to higher education are more than 10 times higher.

In other words, far from being caused by funding cuts, the astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education. If over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.

[Emphasis mine]

I know I'm nit picking but the phrase "I can't afford to do more than rent, and that's clear, so renter I am." is like nails on a chalk board.

I'm ok with you can't afford the smallest house in the area you want to live. But renting should always be more expensive than owning for the same type of property. Middle class families own houses because they are cheaper per square foot. Not as many have noted because houses make you middle class.

I'm all sorts of against most government spending. I'm not sure I buy the "renting is cheaper" idea, though, unless you move frequently. We own (have a mortgage, yeah, but not a 30 year one) a 2100 sq ft 4/3 suburban home. Our mortgage is right about $1100 a month. You can't rent a 1600 sq ft 3/2 for less than $1400 a month, here. Closer to $1500 is probably more accurate. Yes, we spend some on maintenance and improvements, we don't spend nearly $5k a year on them, even averaged out over time with the big items, like granite counters. Our mortgage payment includes our homeowners insurance and taxes. After all, landlords aren't in the business to lose money.

Gov't has no business paying for peoples college or homes.

I can't afford to do more than rent, and that's clear, so renter I am.

I get what Amy is saying. I sold my house a few years ago, so I could start renting precisely because I couldn't afford to own any more. I've always said homeownership is a two-income proposition. Besides the obvious taxes and insurance, you always have to worry about a leaky roof, a water heater blowing up, appliances needing to be replaced, and the list goes on. So yeah, I like the idea of letting someone else pay for those repairs.

When I was still in the house, making the mortgage payment every month took every penny I made and I couldn't do much saving. The fear of having something catastrophic happening and trying to pay for it was enough to get me to put it up for sale. In 1998 when we bought the house, we were a two-income household so it was totally feasible, unfortunately he passed away in 2003. We didn't get ourselves into some screwy loan that had us mortgaged to the hilt. We bought at a time when property prices were pretty normal ($285k for a 4 bedroom house in Huntington Beach), with a 30-year fixed mortgage.

with you can't afford the smallest house in the area you want to live. But renting should always be more expensive than owning for the same type of property. Middle class families own houses because they are cheaper per square foot. Not as many have noted because houses make you middle class.

Posted by: Ben at January 13, 2016 12:52 PM

One of the best ways to tell that you are a real estate bubble, is renting usually ends up being *less* expensive than owning.

There are transaction costs to owning a house. And landlords who are renting properties that they paid off years ago, can often accept less rent than the cost of a new mortgage on that same property. The test is, not what you could sell your real property for but what would that money you have invested in your rental property earn you after taxes, if it was in another investment like the stock market for instance?

And Ben, Capital gains taxes can be a bitch, (you can't make much on real estate without the Feds taking quite a bit of it, unless you roll that profit into another property.)

An additional point, house values and rents usually keep pace with inflation. While your portfolio and retirement are eroded away.

I shifted half my assets over to rental properties in 2009. It was the best choice. Many of my friends have done the same. When I retire those properties will still be bringing in income. And all repairs, maintenance, and rental costs and taxes can be written off against that income, while I maintain ownership of a real property asset.

Besides the obvious taxes and insurance, you always have to worry about a leaky roof, a water heater blowing up, appliances needing to be replaced, and the list goes on. So yeah, I like the idea of letting someone else pay for those repairs. ~ Posted by: sara at January 13, 2016 3:21 PM

And that someone else, as landlord, can write off those expenses as a business expense.

You, as the resident-owner, can't. They're just the cost of owning a house.

" I like the idea of letting someone else pay for those repairs."

Holy shit. You have no idea. YOU are paying for those repairs through your rent. NOTHING IS FREE.

Piece of mind is priceless Rad.

I got hit w/needing a new water heater and a new roof in the same year. HVAC and window improvements were prior but known and budgeted for.

Our water as well as the treatment chemical here eats up stuff (bottle water is big here) so a new water heater is periodic.

Insurance and taxes have doubled in ten years (maybe not but yehowza they've gone up).

As soon as my outside pet tribe dies off in 8 years or so we are seriously looking at getting out of home ownership.

Conan and Rad, I'm completely aware that my rent is paying for those things and I get no tax benefit. The benefit to me is I don't have to have the capital up front for those expenditures. I don't have the stress of "what-if" hanging over me every time I hear a strange noise from the HVAC or water heater. Now I can throw more money in my 401k, I can afford to travel and I have a few bucks in the bank for things I enjoy. It's a lifestyle choice. Thankfully, I'm in a nice townhouse, in a nice neighborhood with great neighbors. The best part is, my landlady likes that the rent is early, I don't call her for much, so my rent is below market value. It has worked for her and me for 8 years now.

Sara,

You made the wise choice in selling. Everything you describe is home ownership gone wrong. But owning a home is not a 'two income only' thing.

I paid $700/mo for a 700sqft third story apartment. At the time I was moving a lot so the hassle of buying and selling a house didn't make sense. After my living situation stabilized I bought a 2000sqft house and was paying $825/mo for mortgage and taxes. Roughly half price per square foot. Once it was paid off I only owed $285/mo in taxes. So ~15% $/sqft compared to renting.

The only reason owning is linked to the middle class is because it is cheaper in the long run. As Isab points out, when rents are cheaper than owning you are in a bubble. Definitely not the time to buy. Yes there are periodic repairs. These can be quite high dollar but they last a long time. I had to replace the AC at my house. I spent ~$10k on the new unit. But I had lived there for ~10 years. So that came out to $84/mo. Obviously if I had borrowed money to get that done it would have cost more. Which is why home ownership used to be linked to above average saving.

As for peace of mind, Bob. Every year my AC broke in that apartment. Every single year. It took a week for them to fix it. A week with over 100F weather and no AC is not peace of mind for me.

"While your portfolio and retirement are eroded away." Isab, if your portfolio isn't keeping up with inflation you definitely are doing it wrong. But that is a discussion for another day.

"While your portfolio and retirement are eroded away." Isab, if your portfolio isn't keeping up with inflation you definitely are doing it wrong. But that is a discussion for another day.

Posted by: Ben at January 14, 2016 7:04 AM

If you are relying in the official government numbers for determining the rate of inflation *you* are doing it wrong.

With interest rates near zero for the last eight years, please link to one investment (any investment available to the general public that has yielded 15 percent annually for the last five years)
Secure investments, not junk bonds....

By my calculations, that is iwhat you would need to exceed the rate of inflation plus a reasonable rate of return.

Real estate is the only investment I know if which has done that.

My stocks have almost the same value they did in 2008.

S&P 500 when you sold in 2008, $683. The S&P 500 today, $1,919. A compound annual growth rate of 18.8%.

If your stocks are the same as they were in 2008 you are doing things very wrong. If you just bought the ticker SPY you would have ~15% annual growth (no one hits it right on the bottom or right on the top) and a 2.5% annual dividend (payout). This is an index fund. About as conservative as they come.

I'm not trying to change your mind Isab. Clearly you should not be investing in stocks. From everything you've said on the subject you tend to buy high and sell low. A regrettably common strategy. But stocks are a perfectly valid asset class for saving and investing.

Common investment options:
1. Business in a niche market
Benefits:
This offers the highest rate of return.
Down side:
This is very location dependent. You have to be able to manage a business. This typically precludes having a job. This is fairly high risk. Very illiquid (hard to buy or sell).
Common rate of return: 50% annual

2. Commercial real estate:
Benefits:
Less risky than option 1.
Down side:
Very location dependent. Fairly illiquid.
Common rate of return: 20%

3. Stocks
Benefits:
Very mobile, very liquid (easy to buy and sell).
Down side:
Low rate of return.
Common rate of return: Matches GDP (5-7% for US)

I'll include bonds just because
4. Bonds (loans)
Benefits:
Very safe.
Down side:
Negative rate of return.
Common rate of return: Below -1% after accounting for inflation.

You are in commercial real estate Isab. A very valid and good investment choice. Your rate of returns sound a little low to me for that asset class. So I guess you are mainly purchasing rent houses. There is nothing wrong with that. If you've found something that works for you please keep doing it. But you might also look at business rental properties in your area. The initial capital costs tend to be higher but the profitability also tends to be a bit higher.

Also note, I said look at. If you aren't in this market yet don't jump in whole hog just because some crazy guy on the net told you to. Diversification is important and with the high capital costs it is harder to maintain. Owning an office building with no one working in it is a terrible thing.

Yes, and if I had picked the right power ball numbers, oh so obvious in hindsight, we would not be having this conversation.

You are incorrect, I don't sell at all. Have no need to but there have been a couple of good investments called in the last couple of years because they didn't need to pay any interest when they could borrow it from someone else at almost zero percent.

You seem to have a very superficial idea of what constitutes a gain or a loss. When you do taxes like I do, and factor in capital gains taxes, you would be amazed how little the market yields for most people.

It is an insider trader game, that most of us are not privy to.

i have seen several highly advertised mutual funds that were being run for the benefit of investment bankers, and hedge fund managers. *they* take the profits, and the peons take the losses.

Remember Hillary and the cattle futures? Didn't think so.

Read *the Devils are all here*. And then pick a fund, or three that you are sure will yield an annual return of 8 percent after taxes, and we will see how well your crystal ball works.

Describing a winning investment strategy after the fact is easy, when you get to pick the start point and the end point for your data Unfortunately not the way the real world of investing works.

(There have been years when the S&P sustained a 31 percent average loss.)

Also Ben, I don't know if you have noticed but small businesses have a very very high failure rate, and have been eaten alive by Amazon and the Internet. That is the very last thing I would be investing in, where I live.

Well Isab, as you put it 'My stocks have almost the same value they did in 2008.' so you obviously aren't that skilled at stock investing. So I'll take your advice with a grain of salt. As for picking the start and stop years, you did that not me. And it's not like SPY is some secretive hedge fund. It's a basic spider index fund. This is about as simple and straight forward as it comes.

Capital gains taxes aren't that hard to calculate. Hold a stock for over a year and
$36,900 or less, 0%
$36,901 to $406,750 (the vast majority of us I expect), 15%
$406,751 and up, 20%.

Tax is on difference between buying price and selling price. Yes, there are a few more minor details. If someone needs them they can easily look them up. I'm not sure where you are seeing magic and demons.

I don't really know what your beef is Isab. I see lots and lots of negative connotations and allusions but precious little fact. Are there times when stocks are a bad investment, sure. In fact we are in such a time. It really is time to sell for most stocks. The market as a whole is significantly overvalued. But the same is true of real estate at times. You pointed out one good metric to tell when real estate is in a bubble is when renting is cheaper than owning. Can people fritter away their savings in the stock market, sure. As they can with most anything else including real estate. Are there insider trading deals, sure. Just like there are in real estate as well. And as you point out in the commodities market with Miss Hilarious. Doesn't mean other people can't make money. As I said, I don't get your beef.

Isab,

I know you do a lot of business in Japan. Are you getting this stuff from the Japanese stock market? Because at that point you actually make sense. Far as I can tell Japan doesn't have a stock market. I know the Tokyo Stock Exchange is a thing, but it's not really a stock exchange in my opinion. If you can't actually purchase full ownership of companies and take them private there is no point. As a permanent minority owner there is just no hope.

Japanese companies know that stock holders aren't actually the owners and they act accordingly. There have been numerous times where it made financial sense to buy 90% of the TSE and shut down the business. The cash on hand was more than the total company stock would cost. Yet this didn't happen like it does in the US. Because the stock holders aren't really the owners. The Japanese government won't let you do hostile takeovers like this. So the TSE is more of a weird cultural thing than anything like an American stock market. There really is no reason to buy any stock listed on the TSE.

Ben, there are companies in the U.S. who do something similar, by issuing "Class A" and "Class B" common stock, where only Class A has voting rights and it is only issued to insiders. Of course, the answer to that is caveat emptor. But I will point out that for decades, the NYSE refused to list companies who did that because they thought it was too sleazy.

I understand and agree Cousin Dave. The difference is there are a few listed US companies that do this. Essentially the entire Japanese stock market does this. And they aren't the only ones. Many nations take a very strong governmental interest in their large corporations. While often not explicitly stated their governments are defacto majority owners. In those situations Isab is completely correct. There is no reason to own any of those 'stocks' without the political power to make that ownership mean something.

As a side note CD I actually own a Class A/B type company. I own 98% of the shares. Unfortunately those are 'limited partner' shares and they don't get a vote. There is another guy who owns 1% of the shares. Lucky for him that is the only 'general partner' share, so he gets 100% of the votes. This is also classically called a poison pill corporation.

I'm good friends with the GP and I plan to remain so for many years to come. Since I'm a contractor I have a higher level of legal liability than most people. I setup this company specifically to protect myself. If I get sued a judge could take away my shares in the company as compensation. That person is then at the mercy of the GP as am I. Since the GP and I are quite friendly I have few worries. But someone who legally but unjustly took my shares away would be much more nervous. It is a strong incentive for others to not raid my piggy bank. But it does require a substantial level of trust for the guy with that only voting share.

Ben, thanks for the writeup. That's an interesting setup. I would tend to view something like that as too risky, but if it works, more power to you.

About ten years ago, I had someone that was wanting me to invest in a startup business preferred-stock deal. After I dug into it, I didn't like the terms. I would be taking on a fair amount of risk without any voice in how the business was run. The only favorable part of the deal was the "guaranteed" return on the preferred stock, but of course even a "guaranteed" return won't be paid if the company is broke.

A deal like mine requires extreme trust. More than most people have in their spouse (and given the divorce rates, no wonder). I don't recommend it for most people. But for me this is a good deal (till it isn't).

I don't blame you on passing up that deal. I would have too. I don't like separated risk and responsibility.

If anyone is still around this is why I say the Tokyo Stock Exchange isn't real.

Back in 2010 Mitani (symbol 8066) had a market cap of $406 million. I.e. for $406 million you could purchase every share of stock. Mitani is a good company. They had been profitable for the 10 years prior and were still growing nicely. The problem is Mitani had about $600 million in cash. So if you borrowed $406 million and bought all of Mitani and took it private you could then repay the loan the very next day with $200 million in profit. Not to mention any physical assets like offices and factories.

Talk about a sweetheart deal. So why didn't this happen? The Japanese government would never allow it. Back in the 80s some US corporate raiders tried to work deals like this in Japan. They raised cash and tried to take companies private. The Japanese government quickly shut that down. The raiders were unable to purchase a single company and soon lost everything they had invested.

As I said, the TSE is not actually a stock exchange. It is best viewed as some sort of bond or annuity exchange. Japanese companies almost never change their dividend payments. So you can look at that as buying an annuity. But it definitely is not stock.