Primary Residence: Determining What You Can Afford

Primary Residence: Determining What You Can Afford

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Typically, people buy the nicest house that they can afford. Sometime the thought process is that increasing income over one’s lifetime will ease the burden of a large house payment. There is some merit to this thought process, but I would also urge you to analyze this purchase as a banker would.

This first most important thing to understand is that a primary residence may be considered a financial asset, but it is also a liability because you always need a place to live. Unless you want to be homeless after you sell it, you will always need to purchase another home or rent another apartment. Now, if you purchase a secondary residence for the strict purpose of being rented out, this is purely a financial asset. Either way, I suggest you analyze the purchase like a banker.

Bankers understand that there are 11 major properties that can be used to judge a financial asset. Even though your primary residence is not a financial asset, these tools can be useful for analyzing any large purchase that you make. A home as an asset has advantages and disadvantages to it’s properties, much like any investment.

  • Moneyness: Ability to buy stuff. For example, cash and checks can be used to purchase food or clothes. A house or car cannot do this. You cannot go to a grocery store and buy food by trading your house. Moneyness is an attractive feature for a short term investor.
  • Divisibility and Denomination: Cash and checks can be divided down to the penny. This is smallest denomination in the United States. Other assets cannot be divided like this. For example, often bonds are sold in units of $500 or $1000. Houses are sold in complete, while condos are sold by the unit. While you could take parts off your car or house and sell them for their individual value, most people can clearly see that the value of the lumber in your house is not worth tearing your house apart to eat for a week. Divisibility is an attractive feature for an investor, but not for a borrower. A borrower does not want to get twenty $5000 loans to purchase a $100,000 home.
  • Reversibility: This is the cost to purchase an asset. Generally, a house bought in cash has no major cost, but there is also no market maker. This is a barrier to buying/selling a home. If you decide you want to sell your home, you most likely have to hold it until you can find a buyer. This makes you the market maker and slows down the process. You can hire a Realtor to assist you in selling the house, but this adds to your market making costs. Reversibility is an attractive feature to an investor, and homes require significant cost when transacting and do not have very good reversibility.
  • Cash Flow: Cash flow is the amount of money that is received from a financial asset. A home, which is lived in (without renters), will always generate negative cash flow. Taxes, insurance, and home repairs all contribute to this negative cash flow on a primary residence. Cash flow is attractive for an investor. A primary residence provides no cash flow, but a rental unit provides cash flow each month.
  • Term to Maturity: Term to maturity is the amount of time before a profit or dividend will be paid to an investor. For a home there is no specific term to maturity. The maturity date is the date that you can sell it. This requires you to become a market maker as stated above. With a thirty year loan, a house will typically not provide any maturity until several years into a loan, preventing sale at any sort of profit.
  • Convertibility: It’s common for corporate bonds to have a convertibility clause which allows them to be converted into normal shares. This is attractive to an investor for negotiating market fluctuations. A home does not provide any sort of convertibility. If the home market crashes, it can not be changed into a car and driven to a different neighborhood.
  • Currency: Because of currency fluctuations between countries, it can be attractive for an investor to have an asset which can be sold in multiple currencies. For example, there are bonds which can pay interest in either yen or dollars. Obviously, homes in the US can only be bought and sold in US dollars.
  • Liquidity: Checking and savings accounts are completely liquid. Assets (dollars) can be removed at any time. With a house, one can sell it faster by lowering the asking price, sometimes greatly loosing money. Therefore, homes do not have a good liquidity property. Home liquidity is further limited by the lack of a market maker to buy the home at any time and the lack of divisibility. Liquidity is an attractive feature for an investor.
  • Return Predictability: Return predictability can be somewhat tracked using the Case/Shiller Home Price Index. Prior to 2008, the predictability of home prices was fairly steady and attractive. Since the housing bubble burst, it has been more difficult to predict home prices. Predictability is attractive for an investor.
  • Complexity: Complex assets are made up of other assets. Derivatives may be considered more complex because they are composed of multiple financial assets with complex conditions on buying and selling. Complexity, well complexity can be attractive for market makers, but often risk is difficult to judge for investors.Homes, are simple assets composed of only one investment which makes it fairly easy to analyze.
  • Tax Status: Tax paid on an asset can vary wildly. Homes typically require payment of tax once or twice per year. The rate of tax paid varies by state, county, and city which can make it difficult to judge. Even within similar houses in similar neighborhoods in the same city, taxes can vary wildly. When purchasing a home, one must consider the tax. The tax can sometimes be negotiated with the state, county or city after purchase, but this is risky. Some states, counties, and cities can lock in tax at a certain rate after a certain age (e.x. San Francisco) – this is very attractive for retirees in volatile markets.

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Crack on Crosby

Crack on Crosby

Crosby street is a strange place to live. It will be quiet for weeks, then chaos for a couple of hours. A couple of years ago, when I first bought my house on Crosby, I was struggling to fix it up. I was painting, patching, sanding floors, etc and I was starting to get tired of doing all of the work by myself.

One day, around this time, a skinny black guy came up to me outside the house and asked if he could help. He was rail thin, his face was sunken, and had missing teeth. Clearly, he had signs of crack use.

Well, at this point my house was vacant except for when I came over to work on it each day, so I didn’t have anything to loose. Learning from my friend Myrl, I gave the guy a shot. It can be frustrating, but I try to give people a chance.

He offered to paint the ceiling in what would eventually become my bedroom for $20, I figured if it took an hour to lay down a couple of coats it was worth it. I gave him a ladder, a paint brush, and some paint. I showed him what to do and went in the other room to finish painting some other stuff. About a minute later he called me and said he was done. I chuckled and walked in. Obviously it was NOT done. He had made a few strokes across the ceiling, but it was nowhere near done. I explained to him that I needed it covered better than that, and we went through this cycle a few times. Finally, I gave up, gave him $20 bucks and told him that I could never let him work again – that this was his one chance. He said he understood, and he seemed to feel genuinely bad. I knew it was drugs.

About an hour later I came out on the back steps and this guy was sitting there. I asked, “what are you doing?” He responded, “Oh, not much. Just got a piece of pussy, some weed and some cigarettes.” I thought to myself, “holy shit, I don’t even want to see what you can buy for $5” Eventually, he left. He was sad, entertaining, annoying, and harmless all at the same time. I ran into him several times over the next couple of months. One time, he even came in the house, and my tenant upstairs almost pulled a gun on him. After about six months, I never saw him again. That was about 3 and 1/2 years ago, and I feared he might have died.

About 10 months ago, I ran into him up in Highland Square. He looked better, and he was alive. He seemed depressed and was working at Portage Country Club washing dishes. He said the people were not too friendly and the job was miserable. I felt bad.

Today, I ran into him again, and I found out his name is John Isaiah. I noticed instantly that his face was full, and he had new teeth. Clearly, he was off the crack. He seemed happy to see me and wasn’t depressed at all. He told me it had been ten months and that he had a job at Hopocan Gardens out in Barberton. It was nice to see somebody turn their life around. I noticed he even had a girlfriend with him. It was genuinely good to see him and now he has a name. I know it is cliche, but people really can turn their lives around, this is why I live here on Crosby. I genuinely believe the rich, the poor, and the middle class all need to live next to each other or things will never get any better.

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I think my feelings on illegal immigration have at last reached critical mass. Arizona’s new social travesty masquerading as a Law is akin to punching Lady Liberty in the bread box. I am ashamed to share a nationality with these people.

No illegal immigrants are taking jobs from “us”. There is no “us” and “them”. There are millions of PEOPLE living here, fancy papers and skin color aside, that work, go to school, buy food, see movies, mow the grass, raise children, and even pay taxes. These PEOPLE are US.

If the good citizens of Arizona were really interested in curtailing immigration they would rally federal support for accountability of American enterprises operating in Mexico. They would urge Congress to enforce a minimum wage on those companies and insist they honour environmental laws. But that’s not what its about.

Hiding behind the noble banter of “Rule of Law” and “Illegal” lurks the insidious secret of the right: They hate these brown bastards. Pure and simple.

This law doesn’t just compel Arizona Police to ferret out working class people and treat them as criminals. If that’s all they were after they already had that power available. Rather, it gives not only the power but the obligation to demand proof of citizenship “where reasonable suspicion exists that the person is an alien who is unlawfully present in the United States”. Guess what guys, they sure ain’t going to reasonably suspect Little Johnny Irish of being here illegally. That honour goes to the brown people of Arizona; apparently automatically guilty, and required to prove themselves innocent.

I’m sure that this law will not last long, as it violates the Constitution(Article 1, Section 8, supported by numerous Supreme Court cases as giving Congress the power to govern entry into the country). The real issue here is how misled the whole thing is and how disheartening it is to watch what are otherwise good people succumb to hate.

I’ll leave you with the poem on the Statue of Liberty:

Not like the brazen giant of Greek fame,

With conquering limbs astride from land to land;

Here at our sea-washed, sunset gates shall stand

A mighty woman with a torch, whose flame

Is the imprisoned lightning, and her name

Mother of Exiles. From her beacon-hand

Glows world-wide welcome; her mild eyes command

The air-bridged harbor that twin cities frame.

“Keep ancient lands, your storied pomp!” cries she

With silent lips. “Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!”

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Ultra Libertarians vs. Compasionate Anarchocapitalists

I often read Matt Assay’s “Open Road”. For the most part I like reading his take on the open source world, but every now and then he posts something that makes me feel like I am researching lesser known connections of some political organization. Really, I didn’t know the Heritage Foundation was connected to Chechnyan Rebels. But wait, aren’t they leading the war on terror?

Recently, he posted a comment about the the differences between the Apache licensing and the GPL (here). I followed one of the links to a blog post from a guy named Benjamin Black (here), notice the title. Both are positing that the Apache license is better than the GPL because it allows more freedom and does not infect your code like a virus, which is generally true, though I am not convinced that this is worse than total freedom. They posit that this can lead to abuse.

Benjamin Black gives two examples of people abusing the GPL. His first example may have some merit (here). It looks like they are dual licensing it, which means they can choose who gets freedom to do different things. The second example is of from Zed Shaw who wrote Mongrel which is a web server that, I believe, is popular among Ruby programmers, though I have never used myself. Zed explains that if he doesn’t GPL than other people and companies can abuse him, which he explains here (here). I think Zed makes a fairly strong, if emotionally connected, points and I feel quite similar to him when I am coding myself.

Either way, I am glad we have the choice between all of these different licenses, but I think I will stick with the GPL for now. The debate rages on, which side are you on?

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