Archive for the ‘Family Matters’ Category

Why house prices cannot recover soon

Thursday, April 15th, 2010

CalculatedRisk already said this in December 2009, but he buried the lead, so a lot of people likely missed it:  for the foreseeable future, house prices are far more likely to fall than rise, because mortgage rates are rising, personal income is flat, and subsidies are falling.

Homes, unlike other kinds of real estate, are historically priced not by their earning power, but as a more-or-less fixed percentage of personal income.  That is, homeowners take on the mortgage they can afford, which is a relatively stable percentage of income.

During the bubble, that relationship got out of whack, but has since been mostly restored (it’s still higher than the historical average, but not much).  This has led the Wall Street Journal and others to argue that houses are now cheap.

But that makes an extrapolation error.  Today’s affordability depends upon today’s interest rates, income and homeowner subsidies.  If these change, then prices will eventually change with them.

If you believe home prices will rise in the next few years, then you must believe one or more of the following must occur to make mortgage payments more affordable:

  1. Mortgage rates will fall.
  2. Personal income will rise.
  3. Subsidies (mortgage deduction, homebuyer credit) will be expanded.

None of these is realistic;  in fact, all three are moving in the opposite direction. Homes are becoming less affordable. Right now. The odds of an abrupt reversal are remote.

Thus, in aggregate, house prices will probably stagnate or decline for the foreseeable future.  There will be regional exceptions, but this is the overall picture for housing in the United States.

Has college become a bad investment?

Monday, October 19th, 2009

Private college appears to deliver negative lifetime return on investment to most attendees.  Provisos are itemized below, so please resist your instinct to recoil, and read the whole thing.

The Census Bureau reported in 2002 that the median college grad’s income was $45,400, compared to $25,900 for the median high school grad.

The College Board reported in 2006 that private college consumed an average of 5.3 years of the student’s time.  Public college took 6.4 years.

I made these rough assumptions:  40-year working life;  discount rate of 8%;  fully loaded tax rate of 30%, including all mandatory payments to all levels of government.

Based on those sources and assumptions, the after-tax present value benefit of a private college degree is about $65,000. That’s total, not per year.

Unfortunately, college costs much more than that — the College Board says the average is $53,000 $69,000 in tuition and fees alone, including all financial aid, before food and rent.  Add in living expenses, and you’re far beyond $65,000.

So it appears the return on investment is very likely negative for most families, and even more negative if we consider the cost of the subsidies.

What this argument isn’t

This is not an argument for more aid, nor less aid.  ROI (return on investment) appears negative regardless of whether tuition is paid by the parent, student loans, scholarships, or the government.  The problem is not financing or subsidy levels, but the fundamental cost/benefit equation.

This is not bashing private colleges.  I have degrees from three, and I’m glad.


NPV is a dubious instrument, highly sensitive to tiny estimation errors in the discount rate.  You can prove anything by turning that dial.  But note that the discount rate would have to be below 6% to justify anything like the median cost of private college today.  It doesn’t add up.

College offers the option value of attending graduate school, which is not reflected in this calculation.

College may have indirect benefits not captured by NPV.

College may have positive externalities for society as a whole, not measured here.

The latest census data on income is several years old, which could invalidate the result.  But I believe it still holds true, because incomes are purportedly nearly stagnant.


There are plenty of ways you could pick this apart, but it’s rearranging deck chairs on an investment Titanic: the answer is so far below zero that you have to make flattering assumptions for private college to look sensible.

Pretty sobering, because it was almost certainly not the case a generation ago.

Public college ROI might be better or worse:  tuition is lower, but since it is internally subsidized, we do not know if the actual cost is lower (though I suspect it is). We do know that students spend much longer attaining a degree there, causing more foregone income.  Could go either way.

More thoughts on college ROI

Wednesday, October 14th, 2009

(Update:  this argument was improve in a later post here.)

This follows up on last week’s assertion that many private colleges are a bad investment, viewed from a purely financial perspective.

Obviously college has more than mere financial benefits.  But those additional benefits are of interest mainly to families that are already somewhat prosperous and educated.  If you agree that much of the value in affordable college education is to help people up the economic ladder, then you must also agree that such people are mainly interested in return on investment — it’s tautological.

In the previous post, I suggested that the cost of servicing college debts was often greater than the financial benefit of college.  This post is more general:  it argues that the net present value (NPV) of an investment in college, no matter how it is paid for, will often be less than zero.  This is the mathematical definition of a bad investment.

Caveat:  be suspicious of NPV arguments, as I’m about to present here.  The NPV equation is inherently unstable.  Its terminal value contains the term (1+g)/(r-g), where g is the growth rate and r is the discount rate, is obviously extremely sensitive to the choice of discount rate.  It’s a tiny number in the denominator — little changes make a big difference.  Tweak that knob a little bit, and you can prove almost anything.  This little arithmetic detail is the precise reason that huge companies make foolish mergers — but that’s another story.

Studies supposedly show that college increases median income by about $19,000.  But that’s pretax.  The after-tax benefit is more like $12,500.  This should really be reduced further to reflect alums who end up not working, but let’s ignore that for now.

We’ll choose a discount rate of 8% — actually quite low, only 3% over a reasonable long-run risk-free rate, on the presumption that one’s income is increased with high reliability by going to college.  This yields a present value for a 40-year working life of about $150,000.

Thus the maximum tuition you should be willing to pay for a “median” college education should be $150,000, or $37,500 per year, assuming no tuition increases.

Uh oh.  The College Board says the average student in 2005 took 5.3 years to complete private college at $30,367 per year, or a total of $152k.  Conclusion:  private college is a bad investment in many, probably even most, cases.

We’re being very generous here — the true situation is almost certainly worse.  For example, the unemployment rate among new alums is now ~20%, so we should reduce the first-year median income by that amount.  This cuts PV to $140,000.  As another example, interest rates are highly likely to be unusually high over the next 20 years.  If the discount rate is 12%, then the maximum logical college expense (tuition plus all expenses) is only $104,000.

Again, the point is that this suggests a low or negative return on investment for expensive second-tier private colleges, regardless of who pays, or how. Whether the government pays, or the school, or your parents, or you borrow tuition from Sallie Mae, the answer is the same:  low or negative return on investment.

A few silver linings:  personal choices can greatly affect outcome.  The levers are the choice of school, choice of major, and number of years spent there.  If you go to a private school known for good placement, then major in something marketable, and then place out of your freshman year with your good AP test scores, then you’re going to do fine.

For everyone else, it looks like the whole system needs a radical overhaul.

Thoughts on college ROI

Thursday, October 8th, 2009

(Update:  this argument was restated and greatly improved in a later post here.)

I heard this week that Georgetown University now costs $65k per year, all in.  I verified it afterward:  tuition is $35k, the rest living expenses.

Costs are similar at many private schools.

You see gee-whiz stories like this all the time, but I’m not going to do that.  Let’s try a little arithmetic instead.

Let’s say you borrowed the entire cost of a 4-year private college education, as many people do.  Student loans are 30-year amortized, just like home loans, so at 5% interest, your payment is about $1400 a month for 30 years.

But that’s an after-tax expense.  Student loans get almost no tax deduction; let’s say you qualify for the maximum deduction, $2500 per year.  Result:  your PRETAX cost to service that debt is a bit over $24,000 per year.

Here’s where it gets interesting.  The median college graduate’s income is about $45,000 per year, while the median high school grad’s income is $26,000.

In short, college increases your pretax income by a median $19,000.  You then pay out $24,000 on those student loans, and… well, I hope you learned enough arithmetic at that fancy college to realize YOU ARE HOSED to the tune of a $5,000 net loss per year, for the next 30 years.

Even the above dramatically understates the problem, because it ignores that the high school grad pays a much lower marginal tax rate;  that tuition is still rising faster than incomes;  and, most importantly, that the interest rate on your student loans in the future is highly, highly likely to be much higher than 5%.

In short, it doesn’t work.  It can’t work.  Unless you have a full scholarship or wealthy parents, you have only a few logical choices.

  1. Go to an inexpensive public university.
  2. Go to a top-tier private school that is highly likely to increase your income by much more than the median.  It’s Ivy League or bust — literally.
  3. Choose only a major that pays far more than the median.  Art history majors, be afraid.
  4. Borrow the full amount, then default and skip the country.
  5. Don’t go to college.

Tough decisions coming, folks.  And to think that, just a couple of years ago, your hardest choice was, “Escalade or Navigator?”  HELOC-funded, of course.

Teacher, teach thyself

Wednesday, August 12th, 2009

Our 4th-grader’s summer writing teacher — a UC Irvine professor — corrected the her misspelled “philosophocal” to instead read “philisophical.” Thanks, big improvement.

The teacher’s assistant then “corrected” a run-on sentence by adding a period in the middle, so that the second “sentence,” now a fragment, began with “but” and a comma — introducing multiple errors with a single change.

That was UC Irvine. The public schools are worse, though we live in a (purportedly) top district.  Either we are misinformed on that point — quite possible — or the situation is still worse elsewhere.

There are at least two potential solutions.  Teachers could learn to spell, or they could dispense with spelling entirely and rely on computer spellchecking. Either solution would be an improvement.

Street smarts

Tuesday, August 4th, 2009

Yesterday morning, I heard two construction refit workers arguing in a parking lot next to their utility trucks.  One looked and sounded typically Californian, while the other was Hollywood’s interpretation of a Bronx hoodlum: musclebound, bandanna, prison tattoos, body piercings, and a deafeningly loud, apishly guttural New York accent, unusual out West.

Apish New Yorker was the smart one.

“Dang, it’s hot today.  I want an inside job,” said Californian.

“You’re a f***ing idiot,” said Apish New Yorker.  ”We got da perfect jobs.  In 10 years dere ain’t gonna be inside jobs.  Dey all goin’ ta India, and da recession jes’ makes ‘em go away faster.  Dey ain’t comin’ back.  You work on a phone or a computer, you history, you gonna be lining up to work for guys like me.  The face-ta-face job, dat’s da job dat sticks, ‘cuz dey can’t move it offshore.  Get wit’ da f***ing program.”

I might have put it differently, but pretty accurate.

Instantly transform higher education (retracted — see update)

Friday, May 22nd, 2009

UPDATED 5/25/09:

Hereby retracted.  A reader sent various rebuttals, but the one that resonated is that subsidized loans are not really voluntary, because the unsubsidized rates are so much higher.

I checked, and found this was even more true than he suggested:  unsubsidized loans are now mostly unavailable at any price, due to the credit crisis.  Thus poorer students have no alternative to subsidized loans.  So the above would amount to an unavoidable invasion of privacy unduly targeting poorer students.

The reader posted other arguments.  Another that held some weight with me was that alcohol is far more abused, yet unregulated.

My goal in this proposal was to try to reverse a decades-long descent of American universities from educational institutions into a form of subsidized arrested development, in which late teens party their way through waning adolescence in the absence of either supervision or consequences.  But clearly this isn’t the way.


Require recipients of federally subsidized student loans to take regular drug tests.

This does not violate privacy, because subsidized loans are voluntary.  If you don’t want to take a drug test, get unsubsidized loans instead.

Sometimes a situation arises so slowly, and becomes so established, that we forget how outrageous it is until we state it bluntly:  for decades, we have offered public subsidies for illegal drug use at universities.  Phrased thus, it doesn’t sound like such a good idea, and obviously delivers negative return on investment.

Among many other advantages, testing would be a social leveler:  the poorer students will be less able to afford drugs, putting them at an academic advantage. So we have a rare case where we can equalize opportunity while simultaneously making government more efficient.

Windows and Learned Helplessness

Sunday, March 15th, 2009

It’s interesting, initially tragic and eventually uplifting, to watch non-technical friends and relatives use Mac after years on Windows.  Like rats who have been shocked at random intervals in the lab, they exhibit persistent learned helplessness at the keyboard, fearing to tread outside the few simple use patterns they are familiar with.  When presented with a new situation, they simply freeze.

But I have developed a solution, one that could only work on Mac.

“How do I get my computer to do X?” I am asked at regular intervals.  If the inquirer is on Windows, I give them a lengthy step-by-step answer, involving 12 levels of nested menus and dialogs, right clicks, genuflecting, etc.

But if they are on Mac, even when I know the answer, I first ask, “What do you wish were the answer to that question? What would be the most logical, dead-simple, effortless answer?  Try that.”  Nine times out of ten, it works.  After this happens a few times, the user is unstuck, and can enjoy computers for the first time.

The long-term stimulus: productivity

Sunday, January 18th, 2009

A key function of a head of state is to articulate national goals, reflecting what the populace already wants, but in a focused, actionable way.

Citizens follow that lead. Deng Xiaoping’s famous quote, “To get rich is glorious,” may be apocryphally attributed, but undoubtedly refocused China on capitalism, with results that speak for themselves.

Americans want to advance economically, but don’t know how.  The government is not helping. Unknown to nearly all Americans, there is a vanishingly simple formula:  maximize your net income per work hour.

What?  you may say.  It is not that simple.  What about controlling spending?  Education?  Savings and investment?  Retirement and vacations?  Yes, those matter, but all are contained within the above formula, if you define net income as any business does:  revenue minus expenses.

Controlling spending:  if you earn $100k this year and spend it all, your net income is zero.  To increase net income quickly, spend less.

Saving:  identical to controlling spending.  If you spend 20% less than you make, you have saved 20% of income.  

Investment:  identical to saving.  Bank accounts are an investment, but there are many other, better investments.  More importantly, investment income doesn’t consume your time:  conservative investments yield very high income per work hour.  Thus, spending less than you earn may not quickly increase your total gross income, but the increase per marginal work hour is incredibly high.

Education:  identical to investment.  It is a way of spending time or money to increase net income per work hour.

Retirement and vacations:  the fewer hours you work for a given income, the higher your income per work hour.  Thus, vacations and retirement go hand in hand with maximizing net income per work hour.  Again, all contained within the simple definition above.

In short, everything comes down to net income per work hour.  Economists would call this a measure of productivity.

The ultimate economically empowering statement from an American president would be “To increase productivity is glorious.”

World's largest ghost town

Monday, July 21st, 2008

Amid the housing bust hype, there is much talk of ghost towns in the most marginal suburbs.

Lest you worry too much about that, consider this, the world’s largest ghost town, likely to remain uninhabited for centuries.

There are worse things than financial crashes. America is not immune to such things, but better protected than most anywhere in the world.