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Friday, February 3. 2012
It's about bubbles - things with form but lacking in substance.
Most "homeowners" have mortgages, if not second mortgages, or at least lines of credit against their homes. If you have a mortgage, you are essentially a renter - but a renter with the capital risk and the maintenance costs and risks. The ownership is an illusion and, if the place is paid off, you lose your interest deduction and so what have you gained by that process of eliminating your leverage? Well, if you are retired with lower income, you have gained the ability to remain in the house if you can cover the property tax.
For economic reasons, more people are renting: Homeownership Rate Falls to Lowest Level Since 1997; The Homeownership Bubble Is Still Deflating.
The American Dream of home ownership is and has been a foolish ideal. However, it was an ideal which expert salesmen sold us since the 1950s. A sentimentality sales job, like cars. Chances are, you ain't buying no family estate that your grandkids would want to own.
Expert salesmen, again both in government and out, also sold us the college degree bubble. Once a meaningful social marker, it has become so diluted that it no longer means anything at all, or, I should say, can mean a lot or can mean nothing, depending on what was learned. I know, because I interview people for jobs. I have seen college grads who don't know what it means to graph a f(x), don't know the difference between RNA and DNA, and have never read Chaucer. Oh, I see. They have a BS in Business Administration. Is that "college"? Oh, somebody wrote a term paper about Virginia Woolf? Wow. I guess they can write a sentence. What is meaningful is a rigorous High School degree. From that, you have the foundation to learn anything you want to.
Is a college degree job training, a few additional High School years, a social marker, an expensive prolonged adolescence, a merit badge, a haven for dedicated scholars, or what? Nobody knows anymore, but it is widely sold as a necessary qualification. Hence a piece like this in the NYT: Why go to college at all?
My theory used to be that a college education should prepare you to understand, in depth, every page of the Sunday New York Times. I don't buy their paper any more, which is their loss. Mine also, to some extent.
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"Why go to college at all?"
I'm not a big fan of unschooling. It's contrary to the whole process of education. These sloppy, poorly thought out answers to questions that obviously aren't well understood, validate that assertion.
A college education is a way around the EEOC and "discrimination" policies.
If you mean it's a way for students to work around the EEOC and laws against discrimination, I'm not sure how that works out. But, it is a way for EMPLOYERS to deal with the unrealistic rules imposed by the bureaucrats who, in the cause of fighting employment discrimination, have essentially outlawed all sensible proficiency tests that employers might use to evaluate potential employees. Just require a college degree for the job, no matter how menial, and immediately cross off half the applications that come over the transom. It may be patently illegal to discriminate against an applicant on the basis of race, gender or sexual orientation, national origin, fluency with English, military service status, ad infinitum, but as far as I know it is still legal to use a candidate's educational credentials as a major criterion in hiring even when the standard may be applied arbitrarily.
"If the place is paid off, you lose your interest deduction and so what have you gained? "
You've gained EQUITY, which no renter gains. As I've posted here on MF before, I paid less than $90K for my house in 1975. Its market value is now 10X that, at least half of the long term capital gain being EQUITY that I did not have to share with any mortgage company or hand over to a landlord investor. And property taxes are not the exclusive financial burden of the homeowner. Renters pay them indirectly, too, because the landlord passes the cost along to the renter in the form of a higher rent. But it is the owner, not the renter, who gets an income tax write off for any property tax payments.
Renting is (by definition) a good financial strategy if you pay less in rent over the long haul than your full expenses in owning AND you conscientiously invest those "savings" every year for the long-term instead of spending them. However, knowing how much you should put away each year to come out ahead by renting is more easily done in 20/20 hindsight than most of us can actually plan for during our lifetimes.
" But it is the owner, not the renter, who gets an income tax write off for any property tax payments."
I didn't know that! Plus, the sentence makes me pause when i consider what it says. Any accountants out there want to reveal the secrets of this tax-code three-card Monte?
There's no secret. Property tax is a deductible business expense. So is the interest paid on a mortgage if the rental property is mortgaged. If you own a rental property, you get to deduct local taxes and mortgage interest like any other expense as an offset to revenue when you file your income taxes.
Nothing except the law of supply and demand in the rental housing market obliges the landlord to pass the tax benefits from those writeoffs along to his renter in the form of a lower rental fee. One iron-clad rule a landlord learns in the real world is: Charge enough rent to cover all of your monthly out-of-pocket costs, including your mortgage interest and taxes, as long as it doesn't leave your property empty and reduce your occupancy rate (which is possibly the biggest killer of profits).
Depending on conditions in the rental housing market, the renter most likely will be covering the landlord's monthly expenses including his mortgage interest and property tax, but the landlord gets to deduct both of them as business expenses when he goes to pay his income taxes.
AG, excellent response. For the landlord does this include school tax? Also, for the homeowner what applies?
Second half 20th century, I came out way ahead buying and selling homes as my military career carried me hither and yon. That was before the feds and the financial finaglers buggered it up. If young today, I think I would rent until ready to settle down for good.
"I don't buy their paper any more, which is their loss. Mine also, to some extent."
Actually, for much of it, if you've read it once you've read it a thousand times.
Feeling a bit dyspeptic today, Barrister? People with mortgages are renters - what piffle is this?
In our case, our rental properties are not mortgaged but our residence is. Got a category for that?
You know, one could make a similar, reductio argument about stock market traders selling short on the margin.
As Agent Cooper points out, you gain equity. More to the point, I think, you gain financial leverage and flexibility. (I'll give you a little slack for recognizing the leverage angle.)
Don't forget that your tenants will slowly but surely pay the mortage off for you. When they do, you'll have the deed. They'll have next month's rent to pay.
But aside from equity, one big advantage to being an owner - even a mortager/renter/owner (as you have it) - is that you gain control of the property.
My mortgagee never comes to visit me nor tells me what color I can paint my house. It can be whatever color I like and the resale consequences are all mine. In fact, I can demolish parts and rebuild them as I see fit.
But I pay a visit to my tenants a couple of times each year. And I'm not shy about telling them what color paint they may use, when the question comes up.
Your higher education rants sometimes make good points. Don't try to stretch the 'bubble' analogy too far, eh?
"But aside from equity, one big advantage to being an owner - even a mortager/renter/owner (as you have it) - is that you gain control of the property."
I agree with this, except that sometimes the property has control of the owner! Home ownership ties a person to a specific location. What happens if the homeowner loses his job? He can't easily move to another locale to take a job if the housing market is so depressed that he can't sell his house. He could move to where the new job is located and rent a place to live, at least temporarily, but apparently a lot of folks are either unwilling or unable to do that. A number of economists think that the unemployment rate of the country remains stubbornly high for just this reason, that the depressed real estate market is keeping workers tied to their undervalued homes and unable to move to another area where there are better employment opportunities. In other words, if the housing market were better, so would the employment rate; and if the employment rate were better, so would the housing market. Chicken, meet egg.
"The ownership is an illusion and, if the place is paid off, you lose your interest deduction and so what have you gained by that process of eliminating your leverage?"
You should never keep a mortgage for the interest deductions. If you send the bank $10,000 in interest, the deduction will get you $1,500 (at 15 percent tax rate).
I bought a modest house 11 years ago and could only claim the deduction for the first 2 years.
What I have gained by paying off the house is the ability to put 16% into retirement accounts and $2000/month toward home improvements.
Thank you, just what I was thinking.
We worked hard in the nineties to pay off the mortgage early, once that was done we maintained that level of expenditure to acquire CD's (back when the interest level made it worthwhile) and put the max into the IRA's and 401K.
Today, after being laid off, I live in the house I wanted without either a mortgage payment or rent. The savings will pay the property taxes as long as I'm likely to live.
The downside was always that we didn't travel or buy big toys as much as we could have. If I had known that my wife would pass away so early I might have done things differently, but we always felt our lives together were full.
I thought Barrister would get to my point about property taxes. He made many great points (as usual) but I think he missed this one:
You don't own what you pay property taxes on. Those taxes are rent you pay to the government.
If you stop paying them either because you refuse or because you can't, the government will take it away. The fact that the taxes may be low in some areas does not change that fact. So in most places, people do not own their homes regardless of how much equity they have in it.
Sorry, mudbug, I can't let you get away with re-defining taxes as "rent" just because paying the tax feels like paying rent. What will you say when the Supreme Court upholds the individual mandate in Obamacare? That you're paying rent on your body?
Do you not own (control, dispose of) your income because you pay federal and (probably) state taxes on it?
Here in Missouri, we pay property taxes on automobiles. By your argument, we don't own our cars. Maybe I should get the folks in Jefferson City to buy my next vehicle, since I won't own it.
Property has been one of the basic things taxed since Colonial times in the U.S. I'm no expert but I think that property taxes, poll ("head") taxes, whiskey taxes, and import/export duties were pretty much the sources of government (state and federal) revenue before the income tax laws were passed.
Back then, I've read, only property owners (i.e., taxpayers) could vote in some places. Some days, that seems like a good idea.
In a renting situation, if you stop paying the rent, you forfeit the thing you are renting. For a car, the only difference is that you can move out of that jurisdiction to one that has no car property tax and avoid the tax. In all other aspects, it is functionally the same as rent. With that exception, if you stop paying, the government will evict you (or repossess your car) just as though THEY owned your house or your car. Explain to me again how that is functionally different from renting?
I think your other examples are a little far afield as they don't have the feature that if you don't pay, the government then takes it from you regardless how much you owe or how much your property is worth. When they take it and then sell it, they don't pay you back the difference between what they got for it and the tax you owed.
I don't know the history of property taxes. I know that at one time, you had to be a property owner to vote, but I don't think that necessarily meant that you paid property taxes on that property. Property taxes may have a long and storied history supported by every politician and statesman for hundreds of years. It doesn't change the fact that the government requires you to pay it in order to possess something.
Explain to me again how that is functionally different from renting?
The difference between taxes and rent is legal not functional. That was my point: you can't call taxes "rent" just because the penalty for not paying taxes is somewhat similar to the penalty for not paying rent.
The difference is that rent is paid as part of a voluntary agreement. If I lease a house, my tenants voluntarily agree to pay monthly rent and I voluntarily agree they'll have possession of that house for the lease period.
Taxes are never paid voluntarily since they're a legal requirement. When I got my first job (that wasn't paid in cash), income tax and SSI were withheld from my pay. I didn't agree with anyone to do that -- I wasn't even part of the discussion, being too young to vote. The business that paid me didn't agree with anyone either. That business withheld those amounts because the law required it to.
And now that I have employees, I do the same. I do not do that voluntarily. I do it because I face stiff penalties for not doing it. (Personally, I'd prefer that everyone still paid taxes quarterly, as they did pre-WW II, so they could "feel the bite".)
I think your other examples are a little far afield as they don't have the feature that if you don't pay, the government then takes it from you
The individual mandate comment may have been distracting but otherwise I have to disagree.
If you fail to pay income tax, the T-men can and will seize anything you have: cash, bank deposits, real estate, your personal property, and so on. And they can lay claim to money you haven't even earned yet through court-ordered garnishments. Who "owns" your income then, eh?
It doesn't change the fact that the government requires you to pay it in order to possess something.
So let me ask again: Do you "own" your income even though you pay tax on it? Or are you "renting" it because the government can seize it (and much else besides) when you don't pay that tax?
Second question: How is that different than your property tax example?
Third question: How would you finance the government? What type of tax would you not regard as "paying rent"?
In my view, a property tax is much less onerous than an income tax. There's certainly a lot less paperwork involved.
The distinction you draw between rent being voluntary and taxes being involuntary is a distinction without a difference. In this case, taxes are rent by another name. It would be a little different if when they took your house for not paying property taxes, that it would give you the difference between the taxes you owe and what they got for the house, but we all know that doesn't happen. So the government forces you to rent your property. Is that impossible to contemplate? The government taxes money from us and gives it to someone else who didn't earn it. Is that theft? YES. Because the government does it doesn't make it moral (or legal I would argue).
I concede some similarities to renting in your example of the income tax. As I say, there is a question about whether it is a direct or indirect tax and I honestly don't know the difference. It could be (I don't know how legitimately) considered a transaction tax. The distinction I draw is that if you have a bunch of money under your mattress and the government taxed the fact that you owned that money and required you to pay a tax every (month/week/quarter/year etc.) because you owned that money - even if you did nothing with it, it just sat under your mattress. That would be the government renting you money.
How would I finance the government? That is a completely different question. I would answer that for the very most part, it should be financed by use fees. We pay gasoline taxes in order to pay for roads. A fee can be charged for city services such as police and fire fighters (on the national level for the armed forces). I would also much prefer a sales tax (even national) since there is nothing in the Constitution that gives the government the right to know how much and where I make my money. I would certainly abolish the income tax because it requires us to possibly incriminate ourselves (violating the Fifth Amendment) and could audit us (violating the Forth Amendment). I despise both property and income taxes.
Now I admit we have not made the distinction between Federal and State taxes. I don't believe the the Constitution prohibits the states from levying property taxes. So as far as I understand, they are not illegal. There may be many arguments against the income tax, but mine are based on the Forth and Fifth Amendments. As such, it is not unconstitutional to have an income tax, but it is unconstitutional to require me to incriminate myself or to provide the government with private papers without a warrant.
One other negative about homeowning. The stress of buying and selling is intense. Will the seller accept my offer? Will the bank approve my mortgage? Will the investment value increase? Will the roof leak? Can I get the money together to put on the new roof? Will the taxes go up? Etc etc. And then: Will I be able to find anybody to buy it? Will the new buyer get approved for a mortgage? Etc etc.
It's a lot of psychic energy. I enjoy fixing a house up. But all the paperwork and stress that goes with it are not good for me. And they take enormous amounts of time. Sitting and waiting to see if your mortgage has been approved, for example -- you kind of can't think about anything else.
"My theory used to be that a college education should prepare you to understand, in depth, every page of the Sunday New York Times."
Now we know why college education has got to be so bad, it's degenerated at the same pace as the NYT to where it's hardly better than kindergarten...
Even after one "owns" one's home, rent is due in the form of property tax to various levels of government.
Strictly speaking, home ownership is simply cheaper renting.