Jump on the low interest rates? …or save for a downpayment?
Recently a certain line of thinking has been promoted by realtors and other various professionals primarily in the real estate and mortgage community. The idea is this: an increase in mortgage interest rates can be much more unpredictable, and at times more devastating, than an increase in home prices… so stop waiting, buy NOW while interest rates are low!
A good example of this type of messaging can be found in this article just published by the NY Times. I also received an e-mail from a friend of mine recently who works as a realtor who was essentially making the same argument.
While their logic is not entirely flawed, those who encourage the purchase of a home NOW rather than later in this manner are really only taking into account two factors – interest rates and home values. But in a home purchase decision, there are a variety of other factors involved that should be taken into consideration.
From a financial perspective, probably the most important other factor would be the amount of down payment a home buyer has ready as they buy a house. I performed an analysis below where I demonstrate that if a prospective home buyer does NOT have a substantial down payment to bring to the table but, at the advice of the real estate gurus in the market rushes to buy a home now in order to take advantage of stellar interest rates, what happens? Well, in that case their monthly payment and total amount paid for the home will be HIGHER than if they had waited to save a 20% down payment and suffered a 1% higher interest rate as a result of waiting.
Examine this chart closely, which takes a hypothetical look at the purchase of a $200,000 home in various down payment and interest rate scenarios:
Scenario 1 represents a buyer who rushes to buy a house in order to take advantage of current low interest rates (which are around 5%), but buys the house with little down (5% in this example, likely the minimum down payment their bank required). It is the most expensive option on the chart, as illustrated by the highlighting of the payments/costs in red. The least expensive option is Scenario 3 — by all means, take advantage of lower interest rates now if you do have a substantial down payment saved up (20% in this example). But note that Scenario 2 assumes the worst with interest rates — a full 1% increase, something that recently hasn’t happened very quickly — and yet demonstrates a strong 20% down payment on the part of the home buyer. And yet Scenario 2 leads to a lower monthly payment and total home cost than Scenario 1. My point is proven!
There are two other factors to consider that I believe make my case even stronger:
- Although 5% is a common current conventional 30-year mortgage rate, a higher rate would normally be charged for a non-conventional loan (a loan with less than a 20% down payment), and/or mortgage protection insurance would be required by the lender, making the home buyer’s cost even higher, further reducing the benefit of the lower rate they are receiving.
- The higher the cost/value of the home, the LARGER the gap grows and the MORE advantageous it becomes to save up a down payment INSTEAD OF jumping in now with little down payment but at a lower interest rate. Above, the difference in the 15-year mortgage monthly payment in Scenario 2 is $153/month ($1,503 minus $1,350). But purchase of a $300,000 home, with the same percentage down payment and interest rate assumptions, will increase that gap to $229/month!
Although unrelated to the down payment issue, I think it’s also important to point out that my chart (for simplicity’s sake) assumes the same interest rate for a 15-year and 30-year mortgage, even though in reality you can get about a 0.60% LOWER interest rate on a 15-year mortgage than on a 30-year mortgage.
I hope that I have sufficiently demonstrated that one must tread carefully when taking the advice of the real estate community in regards to the timing of when you should you buy a house as it relates to interest rates, home prices, etc. When do I think someone should buy a house? Outside of home market price considerations, my answer would be to buy when they have saved up a substantial down payment and have demonstrated by doing so that they can live within their means and afford the monthly payment of the house they wish to purchase.
For a more exhaustive treatment of the argument behind saving up a substantial down payment, see my blog post “Saving for a home down payment: 4 BENEFITS”.
Ah, forget the mortgage… but I HAVE to pay my credit card!?
This recent article highlighted the irony in the credit crisis and the home mortgage crisis. There has been almost endless talk over the past couple of years about mortgage re-works, government assistance to struggling homeowners, and a variety of efforts to reduce foreclosures.
Not that any of these things are bad in and of themselves, but I think it may have planted some ideas in the minds of mortgage-burdened homeowners that were likely not intended.
As explained by this article in the San Francisco Business Times, a TransUnion study found that the percentage of homeowners deliquent on their mortgages but were current on credit card obligations increased, while the percentage of individuals in the opposite scenario (current on their mortgages but delinquent on credit card obligations) increased.
Contrary to the conventional wisdom that individuals will tend to favor secured loans/credit (such as debt secured by a home or a car) over unsecured debt (credit card debt, for example) when it comes to staying current on payments. But this new evidence suggests that the trend is reversing.
Why? There are a few reasons this could be occuring:
- The speed of creditor retribution is much slower and much less dramatic with a mortgage than with a credit card. A deliquent mortgage payment may result in phone calls, but the ultimate penalty (foreclosure and the eviction that comes with it) is literally months away from the first missed payment, and with banks eager to avoid foreclosure in many cases, homeowners know they will likely have many opportunities to make things right. On the other hand, credit card companies quickly hit cardholders with late fees for missed payments, not to mention the ongoing interest charges on their balance, often which are at a very high percentage.
- Credit cards are “helpful” to meet ongoing living expenses. If their ability to spend via credit cards is cut off, desperate consumers may be unable to buy groceries or put gas in their vehicles. It makes a lot of sense in the short-term to make a minimum credit card payment and keep the card open for ongoing spending if they are struggling to meet base-level needs such as food for the family.
- Homeowners deliquent on their mortgages are beginning to “call the bluff” of the banks. As mentioned a moment ago, all of the press coverage on the issue of mortgages gone bad and looming foreclosures may have made many homeowners disbelieving that their bank will ever actually foreclose on THEM.
- Homeowners have lost hope. With home price depreciation not reversing any time soon in many markets, recent owners of highly-leveraged homes don’t see any path to getting into positive equity territory any time soon. It could be argued that many homeowners consider foreclosure inevitable, so why continue to make payments?
As much as I loathe and discourage consumer (credit card) debt, vehicle debt, and highly-leveraged home ownership, the trend indicated by the TransUnion study is not surprising.
Creditors and consumers alike would be wise to think through the implications of this trend on their current and future practices.
Goals for GIVING: How to execute better in 2010
Many people DESIRE to give.
Many people PLAN to give.
But many folks, despite meeting other financial goals in their life come year end, FAIL to meet charitable giving goals purely because they do not know what organization to give to. As a result, they may simply scramble and write a check to the first charitable organization to call them the last week of December, or send a check to a national well-known organization that they trust.
Others without a giving plan may fail to give because they find themselves spending money they had initially intended to give to a charitable cause. Or, maybe they have not spent it and intend it to be for giving, but by not giving in the current year they lose the tax deduction benefit until the year in which they make the gift.
Uncertainty about what organization to give to should not prevent individuals from setting aside the dollars that they intend to direct to charitable causes. The use of a donor-advised fund is, I believe, an excellent solution to the problems discussed here.
A donor-advised fund is a type of account that allows you to donate money into the fund NOW, and let the money sit in the fund (and even grow with interest) until you decide where to “advise” the fund managers to “direct” the funds. Obviously, if you have a regular organization you are giving to then there’s no need to go through this process, just give directly to the organization. But for periods of time when you wish to budget and set aside funds that will be given to an organization of your choosing LATER, the donor-advised fund is an excellent option.
Think of a donor-advised charitable fund as something more structured than off-the-cuff immediate giving, and yet less structured and complex than a foundation. Many foundations, in fact, are beginning to transfer their assets into these charitable giving funds to reduce their administrative and record-keeping burden.
If you regularly give 100% of your planned charitable giving in the same year in which you set aside those funds, then a charitable gift fund may not be right for you. As always, you should consult a financial planner or other professional that you hire to advise you based on your particular circumstances. However, I hope this overview of donor-advised funds below provides a strong introduction to this financial tool.
There are several KEY ADVANTAGES of the use of donor-advised funds:
1. It gets the money out of your checking account – With a donor-advised fund, you can make periodic contributions if you wish. Make your regular contributions correspond with your paycheck frequency, for example, if you want an easy way to budget your charitable giving. By providing a way of getting the funds out of your checking account (despite not yet knowing where you will ultimately direct the funds), it helps you live up to your giving commitments and keeps you from spending the money before you realize it.
2. You realize a tax deduction in the current year – By “donating” the funds to the donor-advised fund in the current year, you are able to claim a charitable giving tax deduction, according to current IRS law, in the current year.
3. Give when, and to whom, as you feel is appropriate – By setting aside these funds and realizing the tax deductions on those donations now, you can be released from the pressure of deciding NOW how to give, and wait until you have identified the right organization, and timing, for your giving.
4. Most charitable funds allow you to invest your donor-advised funds until you are ready to recommend a grant – By investing the money inside your donor-advised fund, you should realize growth, exempt from taxes, of those funds until you are ready to instruct the charitable fund to issue a “grant” of funds. Not only does this help to offset any effects of inflation on those monies, but the growth you experience in the fund through investment returns will also help to offset the minimal fees associated with operating such an account.
5. Donate non-cash assets. Not only can you transfer cash into a donor-advised account, but you can also transfer real estate, business interests, restricted securities, and other non-cash assets.
Here is the BASIC PROCESS of setting up and using a donor-advised fund:
STEP 1: SELECTING A DONOR-ADVISED FUND PROVIDER
There a number of charitable fund organizations that allow you to set up a donor-advised fund, including most of the major brokerage houses. To illustrate differences between the features of various charitable fund organizations, I have created the chart below to demonstrate fee and minimums differences between three of the more popular charitable funds. As you peruse the chart, the following definitions may be of help:
Minimum Initial Contribution: This is the minimum amount you can donate to open a fund. If the amount is a bit steep for you, then one approach to take would be to, possibly in addition to your normal giving during this year, save up the amount over the course of this year that you plan to give NEXT year, but instead donate it to the fund at the very end of this year, thereby ensuring that you get the tax deduction in the current year.
Minimum Subsequent Contributions: This is the minimum amount of future donations to the fund. If you find it takes a few months to save up $500 or $1,000 towards giving, then a charitable fund may not be appropriate for you if you struggle to keep those funds set aside while saving up for the minimum.
Minimum Grant Amount: This is the minimum amount of money you can request the charitable fund to “grant” on your behalf to a qualified organization of your choosing.
Annual Fee: Most of the charitable fund organizations charge a fee on your fund balance, on a sliding scale basis that typically DECREASES as the size of your balance grows. Most charitable funds assess 1/12th of this fee on a monthly basis based on the average fund balance during the month. For example, if your fund charges 0.60% on the first $500,000 in your fund, and you have $25,000 in your fund throughout an entire month, the fee charged against your fund at the end of the month would be 0.05% of $25,000 (1/12th of 0.60%), or $12.50 for that month. Also, see Step #4 below for a further discussion on investing inside of your charitable fund. You may also wish to question the organization you are considering selecting to determine if there are other fees related to grant distributions, etc.
A COMPARISON CHART OF 3 CHARITABLE FUND ORGANIZATIONS
In our family we decided to select the Schwab Charitable Fund for a number of reasons – we liked the ability to invest the funds in our donor-advised account, their fee was comparable to other organizations in the market, and also for the fact that we had other IRA’s and brokerage accounts with Charles Schwab and so it made for an easier logistical setup for fund donation, etc.
STEP 2: SETTING UP YOUR DONOR-ADVISED ACCOUNT
Once you have selected the charitable fund organization you wish to use, simply download the application from their website, complete the application, and submit to the organization with your initial contribution. NOTE: It is important to get more information from your charitable fund about their process of approving charities before you commit to opening a fund; see Step #4 below.
Remember, any money you donate to the account is deductible in the year of the gift. Also, remember that once you have transferred money to the donor-advised account, you no longer have rights to the funds — you have given those funds away for all intents and purposes, even though you retain the ability to invest the funds and direct the funds to qualified organizations, as you wish.
Pretty straightforward, right?
STEP 3: MAKE SUBSEQUENT DONATIONS TO YOUR DONOR-ADVISED ACCOUNT AS YOU WISH
As you wish and have funds to do so, you can make subsequent donations to your donor-advised account any time you wish, as long as that additional gift meets the minimum required by the charitable fund organization you are using.
Your fund organization will very likely allow you to set up automated gifts through automatic transfers from your checking or brokerage account. You can also always send in individuals gifts however often you wish. However much and howevre often you contribute to this account, doing so is a key practice in reaching your long-time giving goals.
STEP 4: INVEST THE FUNDS INSIDE OF YOUR DONOR-ADVISED ACCOUNT AS YOU WISH
As described earlier, most charitable funds will let you invest the funds inside of the donor-advised account in various mutual funds.
Many charitable funds allow you to invest the donated dollars that are sitting in your donor-advised fund; these monies can be invested in mutual funds with varying levels of risk and expected return. These individual investments within the fund will carry fees with them, like mutual funds or investments in any brokerage account would, so make sure to keep that in mind.
As described earlier, investing these funds will help to offset any effects of inflation on those monies, and the growth you experience in the fund through investment returns will also help to offset the minimal fees associated with operating such an account.
If you do not anticipate holding the monies in the fund long and expect to give them quickly, then simply keep them in “cash” form inside the fund and avoid these investment fees. You will of course be also foregoing any investment returns that may have occurred during that time.
STEP 5: RECOMMEND “GRANTS” TO BE MADE OUT OF YOUR DONOR-ADVISED ACCOUNT
When you wish to give to an organization, you will simply notify your charitable fund either by completing a form online or submitting a hard copy form. Most national organizations will already be on the charitable funds “approved list of charities”. You should expect to be able to give funds to any 501(c)(3) non-profit organization. Additionally you can give to educational institutions and religious organizations, even though many religious organizations may have a “de facto” non-profit status though they are not all required to have filed for 501(c)(3) registration. It is important to get more information from your charitable fund about their process of approving charities before you commit to opening a fund.
Once you “recommend” that your charitable fund send a “grant” to a qualified organization, you can expect them to do so quickly, within a matter of days. Remember that even if the charitable organization that is given to erroneously claims your gift is tax-deductible and includes that grant in their statement of your giving that they provide you at the end of the year, that is not actually possible. You received a tax deduction once when you donated the funds to your donor-advised charitable fund; you cannot receive a second tax deduction when the charitable fund grants the charitable organization some of those dollars.
CONCLUSION
Giving, like so much else is life, is often simply a matter of developing a plan and executing on that plan.
Donor-advised accounts offer an easy, accessible way for individuals, families, and even corporations to budget their giving on an ongoing basis, ensuring that tax benefits are accelerated and most importantly ensuring the funds are directed out of one’s hands and into an account that can only be used to later give those funds in a charitable way.
The issue of “What Organization Should I Give To?” is ALSO an important question, but also very different from one person or family to another, and is too big of a question to be covered here in this blog post.
It is my hope that readers of this post now have a better understanding of an innovative way of executing their giving plan through the use of donor-advised charitable funds.
Intriguing quote from Adam Smith
I’m reading Going Broke: Why Americans Can’t Hold on to Their Money by Stuart Vyse. I have just started the book but I suppose I will eventually write a summary/review of the book here on my blog, but in the second chapter today, I encountered Vyse’s quoting this famous passage from Adam Smith’s Wealth of Nations. Vyse provides some supplemental explanation with it — I thought it would be worth reproducing here:
“The man who borrows in order to spend will soon be ruined, and he who lends to him will generally have occasion to repent of his folly. To borrow or to lend for such a purpose, therefore, is in all cases, where gross usury is out of the question, contrary to the interest of both parties.”
Loans for the purchase of durable goods or investment in business or production, on the other hand, had the potential to produce wealth, so these forms of lending were acceptable.
As Vyse goes on to explain, in Smith’s view of a healthy economy lending was permitted, but was only considered ideal in cases where the lending was done for the purposes of enabling production.
It is fairly ironic the Adam Smith’s thoughts and economic theories are widely referenced and his advice followed by many free market capitalists in the United States and elsewhere, and yet clearly business leaders nor the general population has taken his advice in this matter. He calls the habit of lending for the purpose of spending “contrary to the interest of both parties”. BOTH parties! The recent economic meltdown, featuring headlines chronicling past years of mortgages gone bad and credit card debt handed out flippantly shows us what happens when both parties ignore this advice. Not only are consumers’ finances ruined, but ultimately the lenders are affected as well.
A good article about Roth IRA conversion
I have recently been asked to address Roth IRA conversion considerations in my blog. However, I read an excellent article on this issue in The New York Times the other day that takes into account all of the most relevant, current issues on this topic, and really provides a good treatment of the issue.
Several items of importance are covered and taken into consideration in the article, including:
- The upcoming lift of the income limit that previously prevented many individuals from contributing to a Roth IRA
- The impact of current (and future anticipated) estate tax law on your decision to convert a standard Roth to a Roth IRA
- Use of the annual gift tax exclusion to accomplish some of what you might have otherwise done with some retirement savings later in life.
Click here for the NY Times article, “Thinking Hard About Retirement and Death”.
Extended warranties: If you must buy them, then at least shop them too!
I recently wrote a blog post discussing the high cost of “extended warranties” or “replacement insurance” on small items. The basic premise of my post was that (generally speaking) the lower the the value of an item you are purchasing, the higher the extended warranty cost will be for that item (as a percentage of the item’s value). I generally warned people against such plans but did provide a framework of how to assess whether it would be worth purchasing such a warranty, as there could be rare times when it makes sense (if it had taken a while to save for the item and you would intend to replace it if ever lost– or if like me, you have a penchant for consistently misplacing certain items regularly, like your cell phone).
Just the other day, I saw a great article in The Dallas Morning News entitled “Shop Around before buying an extended electronics warranty” that reinforces much of what I wrote pertaining to extended warranties on merchandise purchases, and also provides more information about these extended warranty products.
I agree with the article’s title, because if you feel like you must buy an extended warranty, then you should treat the purchase of the warranty just like you often treat the purchase of the device: shop around first! The article also provides some helpful guidance along those lines from Consumer Reports, which “says 20 percent of the purchase price of the covered item is the max that anyone should pay for an extended warranty.”
Here is an excerpt from the Dallas Morning News article:
Shoppers are predicted to spend $1.3 billion on extended warranties for electronics and appliances this holiday season, according to industry journal Warranty Week.
Many of those sales will occur at the cash registers of retail stores where otherwise well-educated shoppers unthinkingly agree to inflated warranties.
“Consumers will spend months and months looking for the best deal [on an electronic gadget], waiting for it to go on sale,” said Geoff Green, president and chief executive at Dallas-based Extended Warranty Group.
“And then that same person will spend double what they should on the warranty.”
The gentleman quoted in the article’s excerpt above, Geoff Green, leads the company behind www.electronicwarranty.com, an alternative source to the extended warranties that are often pushed heavily on consumers at the checkout in stores. This to me seems like a very good business idea, and one that pays off for consumers– Mr. Green clearly recognizes that stores are pricing these warranties far too high and has provided another way for consumers to get coverage on such items at a more reasonable cost.
The lesson is this: put some energy not only into shopping for the best price for the item, but also shopping for the best available warranty by looking at sources of warranty coverage beyond the retailer itself — sources such as www.electronicwarranty.com
Happy shopping!
Own a credit card for that favorite store of yours in the mall? Be careful…
There’s a great story in the NY Times today about the potential pitfalls of store-branded cards, exposing the unsavory terms attached to their cards.
All of us have been asked when checking out at Dillards, the Gap, Lowes Hardware, or any number of other stores if we would “like to sign up for a store credit card and save 15% on today’s purchase??”
If you are in the store to purchase a large item, such a proposition may be tempting, but it appears that the unimpressive terms of the typical store credit card makes the chances of such a discount later being wiped away with just one missed or late payment.
Tara Siegel Bernard’s article yesterday in the NY Times has a lot of good factual and wise nuggets, including this:
…if you strip away the store discounts and brand names that come with these cards, many are essentially the same products marketed to subprime borrowers, or individuals with tarnished or fairly new credit histories. Would you really chose a card with an interest rate of say, 25 percent, or about 9 percentage points higher on average than many other credit cards? …you should also be considering the card’s terms along with the possible effect on your credit score.
She goes on to quote a consumer debt specialist who discusses the negative impact on your credit score that often occurs with the addition of a credit card, and what the reduction of your credit score below certain critical limits can do to you.
We would be wise to heed her warning.
Mint.com’s Aaron Patzer: wisdom beyond his 29 years
One of the more fascinating technology stories of the year, which transcended both the software and SaaS communities, was the sale of Mint.com to Intuit (the makers of Quicken).
Mint.com was the brainchild of a 20-something named Aaron Patzer who was frustrated with the lack of a good online money management solution. The company took off, and two years and 1.7 million users later was purchased by Intuit in early November 2009.
Intuit purchased Mint.com for $170 million, which is an incredible sum — and yet, it was probably worth it for Intuit to stay the top-dog in personal financial management for the indefinite future, particularly given Microsoft’s recent announcement that they were ceasing development and future sales of MS Money. Mint.com’s momentum in the online money management space was simply too quick for Intuit’s new Quicken Online offering to compete with.
In the future, I will blog more extensively about some of the strengths and weaknesses of Mint.com’s product, as well as review the other players in the online personal money management world.
But as I have followed these recent developments with the sale of Mint.com in a variety of news sources and technology blogs, I must say that one of the most impressive aspects of the story has been the level-headedness maintained by 29-year old Aaron Patzer after selling his business for a huge amount of money–Patzer now heads up the personal finance division at Intuit. A good example of his attitude is found in his response to a question posed by a reporter in a recent NY Times article about any changes that may have occurred in his life since the sale of Mint.com and the resulting financial windfall:
Q. Have you relaxed it any since the sale?
A. My personal rule is I’m not touching anything I got from the acquisition. I’m just going to continue to live off of my income. I’ve relaxed my budget on travel and hotels just so I can do a little more exotic travel. I’m going to New Zealand this Christmas and I’m very excited about that. I relaxed my grocery budget so I can shop at Whole Foods instead of Safeway.
His maturity and humility are no doubt the same characteristics that led to the growth of Mint.com to start with.
Popular technology blog TechCrunch published Aaron’s account of the building of Mint.com, and the article included this description, by Aaron, of the early days:
Mint was built in the Silicon Valley way. It started in my apartment, with Matt Snider and Poornima Vijayashanker. We interviewed the first real “professional,” our VP of Engineering, David Michaels in our kitchen.
Most astounding of all is the fact that this was only 2 short years ago! Surely these humble beginnings, and the quick and rapid rise of his company with little time for him to get comfortable and relax, has aided in the preservation of his humility today.
Instead, in his new role now at Intuit he “wants to keep pushing online, as well as mobile, desktop apps, and international (which is hard to do in finance with a 38-person startup)”, according to another TechCrunch article.
ALL of us can learn from the lack of emphasis he is putting on his new-found wealth and his focus instead on continued excellence and leadership in his work.
Why Austin is #7 in “Online Giving”
An article came up a couple of months ago in the Austin Business Journal stating that the city was #7 in the nation in “Online Giving”.
In 2003 a study was released by The Chronicle of Philanthropy that showed Austin ranked 48th in giving of 50 largest cities in the country. However, Austin’s population puts it nationally as the 15th largest city. So if the city’s per-capita giving was “average”, you would expect their charitable giving rank to be similar to their population rank, but obviously that is not the case.
So after such a disappointing rank of overall giving, we now show up high in a list of cities participating in online giving. What gives? Why is this so? A few key points should be made here.
First of all, Austin ranks as #3 on Wired.com’s list of “Top 10 Tech Towns”. Obviously a town that is very comfortable with technology (and certainly Austin, which is the home of Dell’s world headquarters and countless other chip makers, software, and online businesses, would fit the bill) would be more likely to have a disproportionate amount of their giving online. Note also the overlap between the Wired.com list and the top 10 list in the article announcing online giving rankings — several cities appear on both top 10 lists – Seattle, and Cambridge (adjacent to and part of the Boston area), just to name a couple.
Secondly, the company that provided the information to the Austin Business Journal for their article mentioned above is Convio, Inc., a well-respected Austin-based software company that provides solutions for non-profit organizations for fundraising, online marketing, and donor tracking. According to the Austin Business Journal article mentioned above where Convio announced the results, “The rankings are based on the online donations Convio processed on behalf of thousands of nonprofits between January and August”. I think it is worth suggesting that Convio may have a disproportionate amount of non-profit customers in the Austin area, given that this is their home, and so this may skew the results somewhat. It must be mentioned, however, that it is encouraging to read in the article that Austin grew from a rank of #14 last year to #7 this year. This jump in rankings for Austin may be a result of the reality of the broader national economic downturn not affecting Texas, and especially not Austin, as badly as it has affected other cities, resulting in a more constant level of giving while more severely affected areas’ giving dropped. Evidence of the relatively good economic shape of Texas and Austin in particular is BusinessWeek’s reporting on October 23, 2009 that San Antonio and Austin were the 1st and 2nd strongest economies in the nation.
Finally, Austin is a very young city — according to Wikipedia, the city’s age makeup is such that over 93% of the population is under age 64, and over 76% is under age 45. Accordingly, one could make an assumption that the average household’s wealth is less given their early career and life stage that much of the city finds itself within. Therefore, charitable giving could be expected to be less common.
Interestingly, Austin ranks 3rd in the nation in volunteerism rates. So while Austin’s wallets may not be as open (or as large) as much of the country, people appear very willing to give their time. (Click here to see more information about volunteerism in Texas).
I predict that as (and if) the population in Austin ages over time, we will see the increased levels of wealth that tends to come with age in a highly-educated city and an increased level of giving. In fact, there has recently been a push locally in Austin for people to give more in general and also to also give locally. “I Live Here, I Give Here” is an organization that was created in recent years to tackle the issue of low rates of giving in the area, and they mention the problem right on their front page. Their mission, as stated online on the day of my writing this blog, in fact, is “to deepen and expand the culture of personal philanthropy in our community by inspiring Central Texans to give more and more Central Texans to give”.
Surely there are signs of hope, and people working on expanding the population’s understanding of non-profit work and the need for financial contributions. Hopefully this will start a trend in the city that is not just reflective of our high rank in the “online giving” category, but in our giving overall.
Price protection for home sellers?
Ugh- just what we need, insurance to protect us against yet another thing that we could “self-insure” against if we wanted to do so. See what I’m talking about by reading this article in the NY Times.
This product, for a percentage point or two of the value of the home when purchased, will insure you against loss of value.
The companies offering this product, I would guess, are betting the success of this product on a couple of strategic assumptions:
1. It assumes that there is a decent chance that a home buyer is only considering staying in their home a short period of time, probably 5 years or less, before moving to a different city, a different place in their city, or to a larger home. If someone plans to move in just a few short years, they may be more likely to purchase this insurance to protect the potential “down side” they would experience if their local housing market tanked and their house plummeted in value right as they were needing to sell it. Rather than having to come up with funds out of pocket, this insurance plan would provide for them.
2. The plans are catering to buyers with little down payment. While most home buyers with substantial down payments would never dream of buying home value insurance, individuals with little or no down payment often understand the risk they are taking and would like to have a way to mitigate that risk. They don’t want to find themselves in the same situation as their old neighbor, or as their near-bankrupt relatives who paid dearly to sell a depreciated house they couldn’t afford due a simultaneous drop in the housing market and loss of their own job and income.
While home value insurance may be helpful for some, if you buy a home you plan to live in for a while– and if you buy it with a decent down payment, there’s no need for these products and it adds yet more costs related to the home purchase transaction. Ironically, one of the major arguments to staying in a house for a while before selling is that the real estate transaction cost incurred when you sell makes up a smaller percentage of your home’s equity than it would over a longer period of time. And yet this product, which itself aims to protect your equity position in your home, just adds to that cost burden.
It will be interesting to see how these products progress — will insurance regulators step in to regulate these products as what they are (insurance!), and what will be the opinion of personal financial coaches and advisors are on these products in the coming years…? Time will tell.
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