Being that I have recently purchased a car, lost half my retirement savings, and rented a house, I feel poor right now. And yet, like the rest of America, I am feeling the powerful lure of the ridiculous sales our nation's merchants are putting on. Yesterday, my housemate suggested that flat screens are so cheap, we might want to get another one. Between the two of us, we already have five televisions (including one that, bizarrely, comes with the house, being affixed to the bathroom ceiling. No, I'm not kidding.) But they're SOOOOOOOOOOOOO cheap!!!
I don't think I'm the only one who's noticed the pathetic desperation of the sale come-ons in my email box. In years past, Christmas sales were a way to steal your custom from more rapacious rivals. Now it just seems like Macy's is begging. "Please, take this unsalable crap off my hands! I'll throw in a toaster! Okay, okay, how about a toaster, free shipping, and a coupon for a half priced entree at Fridays? What about that? No? Pleeeeeeeeeeeeeeaaaaaaaaaaase."
And I suspect that this is shaking loose some of the money that has frozen up. Because even though I feel poor, it almost seems like losing money to pass up these deals. As Ta-Nehisi said on Black Friday: My e-mail was deluged with deals, and I
almost bought 42" flat-screen for like $500. And then I got to
thinking. Why? Was I even shopping for a TV? Or was I just enticed by
the possibility of getting over?" There's some part of our brain that treats bargain items, even bargain items we don't need, as an investment rather than an expense. Okay, you've spent $500, but you've got $1000 worth of television!
The problem with this is that utility is a relative, not an absolute. The market price is (sort of) an average of the item's utility, not a measure of its utility to you. For us, the utility of another flat screen television is almost certainly less than almost anything else we'd spend the $400 on. We didn't get the television. But I still feel kind of like I'm missing out.
But you can't base an economy on this feeling (though Lord knows, we've tried!) I'm sure all the bargains and loss leaders are generating some consumer spending. But I'm still willing to bet that most retailers will report horrific margins and a terrible year for profits.
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They don't need profits, they just need to turn themselves into bank holding companies. Fighting for profits is the game of fools.
"But I'm still willing to bet that most retailers will report horrific margins and a terrible year for profits."
I've always thought that about Walmart..."this quarter they will finally suffer, after all you can't keep discounting for ever?" But they're usually doing just great.
On a side note, I haven't owned a TV in years (5) because I moved awhile back and was waiting for the flat screens to come back down in price before getting one. Now that they are all super low I find myself still waiting... because I've gone without TV for so long, it's not that big a deal to me anymore, although the new ones still look awesome. But I find myself sitting on the sidelines thinking, "if I wait a little bit longer..."
Ya, I'm probably 1 of 4 people like me left...
Now I understand why Megan was persuaded to move house. A TV in the bathroom ceiling beats any reduction that the most desperate real estate agency can offer.
I am feeling the powerful lure of the ridiculous sales our nation's merchants are putting on.
Apparently you haven't been gun shopping lately. I could probably get $500 for my used AK that I bought new for $250 back in 2000 or so. It's by far the best investment in my portfolio.
I'm just amazed at how fast we went from inflation to deflation.
In fact I experienced my very own deflationary spiral - e gas guage was almost on E - but I said - just wait till tomorrow and it will be cheaper - and it was.
Also, 6 months ago people were saying the only asset class to be in was commidities - gold, oil etc. Stocks, real estate, were a fools game and bonds would fall as inflation worsened. But, as it turns out US Gov't debt has been the only thing to do well in the past six months. Stocks, real estate, gold, oil, etc. are all down +25%.
It turns out that our economy is based on people spending money the don't have (via mortgages and credit cards) to buy things they don't need (like McMansions & that 23rd flatscren), and if that slows down for one second, the the whole thing collapses.
How do we put that into the standard macro framework?
"Ya, I'm probably 1 of 4 people like me left..." No, I am also in the mold. I am completely unaffected by the retailer come ons that Megan mentioned. Never been afflcited with consumerism. Kinda want a Blu Ray player, but never really get around to buying one, 'cause there's simply no "need". The only thing nudging me to spend now is to help stimulate the economy.
Being that I have recently purchased a car, lost half my retirement savings, and rented a house, I feel poor right now.
Megan: This sentence just ruined the day of anybody who taught you English, ever.
I don't know. I bought a 1080P 52" HDTV from LG about 6 months ago for $2,500 cash and have enjoyed every minute of it. I don't use credit cards for anything; everything I buy, from a $3 latte at Starbucks to a $2,500 TV is paid with cash and deducted immediately from my checking account.
I was watching the Godfather II last night on it (not the newly released Blu-Ray version but the original DVD release) and Michael Corleone and Hyman Roth never looked so good.
And the night before that I watched Soderbergh's Out of Sight and, well, Jennifer Lopez was in my sights for the whole night. In near-high def.
Those moments alone are worth a large portion of the purchase price; multiply that across dozens of movies, and, well, I think I have a bargain.
Maybe it's just avarice, but I get way more satisfaction from logging into my bank account and seeing the dollars in my savings account climb every month than I do from having stuff, or even from getting a good deal on something I wanted.
I have to force myself to spend money--not a trait my wife loves, but seems to be serving us well at the moment.
I have friends who graduated from college with 10k, 15k, even 20k in credit card debt. 15k @ 20% is nearly 300 a month. They were able to consume from age 18-22 but their consumption is lower from 22 onward.
Wouldn't it be true that, in the long term, people who don't carry any credit card debt end up with more disposable income than those who do?
I haven't noticed a significant decrease in prices for the really important things: like liquor.
Tell me about it.
I already have a 27" 720p, but recently found myself tempted to buy a 40"+ 1080p. Meanwhile, I live alone, rarely watch DVDs, and don't even have cable. Funny how that works.
"Wouldn't it be true that, in the long term, people who don't carry any credit card debt end up with more disposable income than those who do?"
Based on my anecdotal experience: yes.
Allow me to explain. As I mentioned above, I don't use credit cards. So I carry no credit card debt. This means that $0 of my after-tax income goes to paying off debt. (I also do not have a mortgage. I have run numbers with a number of different scenarios and do not see how one generates a positive return on real estate, after taking into account all of its carrying and transaction costs. Therefore, I rent.)
A friend of mine, who does own an apartment, nonethelss carries a credit card balance and dutifully pays $500 at the end of the month, rather than paying off the whole balance. I get the feeling he has enough cash to pay off his balance entirely, but, somehow, in his mind, carrying the balance every month, but paying $500 on time, so as to not incur penalties, is prudent personal financial management. The interest he accrues on his credit card is discretionary income he no longer has, nor can it be used to pay down the principal on his mortgage, which would save him yet more interest.
To each their own as they say.
Oh, crap, because I've been trying to find a way to drink and to bathe in gasoline. A steal at $2/gallon, you know!
I have run numbers with a number of different scenarios and do not see how one generates a positive return on real estate, after taking into account all of its carrying and transaction costs. Therefore, I rent.
Dave, a couple of questions for you:
1) While you certainly sound like you know what you're doing, don't you worry about not locking in a hedge against rental inflation? It must truly suck to find oneself at age, say, 70, just when a highly inflationary period starts to send apartment rental prices through the roof. I'm just curious about your thoughts on this issue. Do you plan to rent indefinitely?
2) Although it doesn't make financial sense to overpay for a piece of housing -- nor stretch one's monthly finances to cover a mortgage that is larger than one can prudently afford, buying (as opposed to renting) a property that you can easily afford offers a great deal of security compared to renting. What I'm getting at is this: for most people, a temporary, sharpish drop in income (due to unemployment, say) isn't an impossibility. If you find yourself in a rental that's not as affordable as it used to be (because your income is now lower), it could be really problematic to find a cheaper alternative, because even if you can find a decent, cheaper apartment, you might not so easily find a landlord willing to rent to someone with your (now reduced) income. There's also the possibility that, for whatever reason (sale of the property for instance), your lease might not be renewed. Again, if you find yourself in this situation while suffering a sharply reduced income, it could prove difficult to get a rental application approved for a different place.
Obviously paying a mortgage with a sharply reduced income is no fun, either. That's why I wrote above "easily" afford. I say if you can find a place to buy and the mortgage payments could be swung working 60 hours a week at Wal-Mart, you're better off buying it than renting, because at least you'll have a roof over your head come what may. No doubt my "buy as soon as you're financially able" mentality flows from living in an expensive east coast city. But what I hated most about renting was the lack of security.
Toll Brothers:
Some answers:
1) I live in Manhattan and so owning an apartment means you pay for (1) mortgage principal and intereste; (2) maintenance fees; (3) taxes (often baked into maintenance). Renting is pretty much always going to be cheaper, barring a 30% or so decline from current prices.
2) There certainly is an unquantifiable, imputed value to owning real estate as opposed to renting. You have, for example, the security of holding title to your own home (or, with Manhattan co-ops, you own a proprietary lease). But if you come to a point where you have trouble paying rent you will also come to a point where you have trouble servicing the costs of owning real estate. So it's not clear to me that the hedge against rental inflation is really a hedge at all.
Do I plan to rent indefinitely? Never say never. I could find myself so flush with cash that I am as indifferent to owning as I am to renting. Or I could find myself in a relationship with a woman who insists on owning. Or...a million other things could happen.
To some extent, these calculations and considerations are different in less expensive areas of the country.
Another comment that bears mentioning about real estate: the notion that holding title to land means you can "take equity out" of the investment and use that equity to finance investment in something else (be it real estate or stocks or commodities or whatever) makes sense only if your equity exceeds your liabilities; that is, it only makes sense if you have an asset. Most people use too much leverage to ever really have an asset.
Toll,
1. It would all depend on what he chose to invest in rather than real estate.
2. The risk is higher in your case if you own - if you need to move to find work and you are forced into a sale you could take a huge hit. Alternatively, you could hang onto your home but settle for a job that paid substantially less than if you moved.
I've long pondered the differences on renting v. owning. I think owning would come down to three factors:
1. Could I do most repairs myself? I am not that handy, so I feel I would need to invest some time in learning how to put in insulation, fix a lawn mower, replace windows, put in a dishwasher, unclog pipes, install drywall, maintain a heating system, paint, clean gutters, put in doors, groutwork, etc. That might take a year or more, but if I could, then a house becomes worth it; I generally like fixing things I know how to fix (computer stuff, car stuff, etc.)
2. Could I pay off the place quickly? I don't like mortgages, and payments are a headache all around. If I could pay down a place in 7 years or less, I'd go for it. The idea of a debt hanging over my head kills me; I'd rather know I could sell it on my own dime rather than for only partial equity later.
3. How sure am I that I like the area? I wouldn't want to buy a place just to flip; that's not me, although I know its fine for others. If I know that I could live in the area forever should the market tank and all I could work with is in the area where the house is, could I survive there? I hate moving, I don't like starter homes and the like.
1) It may bear stating that this phenomenon is not a trick: if the price of a really nice TV is cut by a lot, you really may be interested in buying at the new price. Maybe you shouldn't actually buy the TV, but it's not irrational to think it's a better deal at the lower price, because it is.
2) I agree with most of Dave's points about NYC real estate, although I would note that one factor that frequently affects the rent-vs-buy decision is whether your kids would lose the ability to attend a particular public school if you were forced to move. (Yes, people of substantial means in NYC have kids attending public school.)
toll brothers -
It's six of one, half a dozen of the other. Yes, owning is a way of hedging against inflation. But the upkeep costs, property taxes, housework, yard work, etc... are costs as well. After trying both renting and paying a mortgage (which I can easily afford) for 5 years (and counting), I can tell you I had more disposable income while renting and was able to put a lot more into savings. If worse comes to worse, having more in savings and not being tied to a geographical location seems more useful than a lot of equity in a house that no one wants to buy.
That being said, I'm not really planning on selling my house until I have to move. This is kind of an experiment for me and I'm reserving final judgment until I pay off the mortgage and can get a broader perspective.
Alkali: your point about kids is an excellent one. It's not relevant to me, so it does not figure into my equation. However, there is a very significant value to buying into particular public school districts; apartments within PS6's zone sell for more than do similar apartments outside the zone.
(For the unitiated: PS 6 is a public elementary school on Manhattan's Upper East Side, generally considered equal to the private schools. At least among those who would deign to send their children to public school.)
"Wouldn't it be true that, in the long term, people who don't carry any credit card debt end up with more disposable income than those who do?"
Obviously. Though, accumulating debt early in life is not necessarily irrational.
In economics it's called consumption smoothing. If a college student has, say, $4,000 dollars a year of disposable income now, and they expect that, in 20 years, they'll have $50,000 a year of disposable income, they might reasonably believe that an extra $1,000 of spending today is worth sacrificing two or three thousand dollars down the road.
This makes sense because people are generally believed to experience diminishing marginal utility of income. That is, if I had a net worth of five million dollars, a gift of a thousand dollars wouldn't make me much happier, but if I was worth five thousand dollars such a gift would be fantastically awesome.
It's called consumption smoothing because, if we could plan things out with certainty, we would choose to consume a roughly constant amount across the years of our life.
The opposite approach (again assuming certainty), which is what you would do if you had constant or increasing marginal utility of income (or, as you suggest, if you simply maximized lifetime disposable income), is to save and invest every penny (i.e. consume nothing which is not necessary) for your entire life, and then, at the moment before you die, spend it all in one massive orgiastic extravaganza.
But, I think going forward, before you buy a place you should try and find out what it would cost to rent something similar. If the total cost to buy is $1500 and rent is $1500 then by all means buy. But, if it's 2500 to buy and 1500 to rent it might not make sense. And if we get back to peak of the rent/own ratio of $3500 to buy and $1500 to rent, it might make sense to rent and bank the 2k a month and wait for the market to correct.
I think people find real estate so appealing because it is the only leveraged investment that most people make. Putting a comparable amount of money into some form of equity is undoubtedly a superior investment (by a very wide margin generally).
But it's not as if people have the money and are deliberately choosing between alternative investments. The idea of leveraging an equity investment and then living in an apartment is not a meaningful alternative for most people. So big returns on (highly leveraged) housing tend to dominate the population of investment anecdotes.
jmo -
You are correct, but many people don't factor into their total costs such things as ever increasing property taxes or time and money spent on upkeep.
Putting a comparable amount of money into some form of equity is undoubtedly a superior investment (by a very wide margin generally).
If by equity you mean stocks, there is quite a bit of doubt lately. Either route has pros and cons. If stocks are overvalued, real estate might be the better choice. The opposite holds as well. Sometimes commodities are the right choice, sometimes government bonds are. The "superior" investment will not be the same thing year after year. Once too many people "invest" in the "superior" investment it ceases to be the superior investment.
Hank,
But what about if we enter a period of deflation similar to what Japan went through in the 1990s. If you bought at the peak in 1990 you either defaulted, took a huge loose, or are still paying your inflated mortgage.
If you were a renter in 1990 I would assume when your lease was up you to told your landlord: "You're now renting similar units for 80000 yen a month not the 110,000 a month I'm paying. Reduce my rent or I'm moving."
Leverage aka debt and deflation do not mix.
I see that Basic Fact has only weighed in once here. Did he do so because the subject doesn't interest him as much as some others or could it be that he just didn't have the time today? I'm putting my money on the fact that Monday happens to be the day when he changes his diapers. Thats da fact Jack.
Ah, Juno, I see it's that time of your month again.
"Being that"? Is that how they teach you to start sentences at the University of Pennsylvania's English department? How about "Now that" instead? The more I read your blog, the more I come to the realization that you've been fighting in the wrong intellectual weight class your whole life, and you are punching below your weight.
Or, you could do the smart thing:
Sit on craigslist near the end of the month and wait for one of the credit-card morons to need money for rent. Drive a good, hard bargain with them with the sight of cash in your wallet and a waiting pickup truck out front.
Drive a bargain hard enough that you know you can flip it for at least a hundred bucks more, no trouble. List the TV right back on craigslist.
Now you've either got a hundred bucks or a nice TV at a great price.
A little OT but could someone rate the TV brands for me? I have a 1980 Mitsubishi that's been doing fine all these years but pretty soon it'll be time for a change.
Unfortunately Mitsubishi doesn't make 32" sets so I've got to find another brand. In the 26-32" LCD segment, who's good? Are the Insignias and Vizios any match for LG, Sony and Samsung?
Also, does anyone offer more than a standard 1 year warranty out of the box? Seems if you're paying for a 32" screen you should get some backing for it. I'm not big on extended warranties.
Many thanks.
No offence, but the thought of you lying in the tub watching tv on the ceiling kinda makes me want to puke!