Mortgage: Every Thing You Buy Costs Twice as Much!

I have written numerous posts recently about the house we are buying. Last week I told a colleague about our mortgage: a 30 year fixed rate loan at 5%. My colleague's advice: "don't stop living". I asked him what he meant, and he explained that in the first few years of the loan, every dollar of principal you pay back, saves you about a dollar in interest payments over the life of the loan (depending on your interest rate and length of your loan). His advice: if you become hyper aware of this you will become overly conscious of your spending. Sure you would pay a dollar for a can of soda, but would you pay $2 for that same can? By buying that soda you are spending a dollar you could pay down on your mortgage and save an extra dollar in interest. You are in fact paying twice for that soda!

Yikes. I never thought of that.

There is a huge financial incentive to do the exact opposite of what my colleague advised. Do we really need those extra channels on cable if they are costing us twice as much? Do we really need to take that family vacation? How about that lunch out? But then, there is the issue of living life...

Interesting conundrum. Any advice or opinions?

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Even for 401(k) - Vigilance Pays

This week we got proof again - as if we needed it - that you should always be vigilant where your finances are involved. I manage our finances using Quicken. It's my way of keeping an eye on all our accounts in one place and making sure that mistakes or even dishonesty don't whittle away at our resources.

Two examples from the past week:

Our dry cleaner charged us $40 to clean a single shirt. $4 was the agreed upon price, and somehow a zero got added to the mix.

A bigger mistake appeared in my 401(k) account. I noticed last week that my mid-month 401(k) contribution never showed up in my account. I waited a few days to make sure that no simple technical glitch was involved, and over the weekend I sent an e-mail to our HR person. Turns out that the company simply did not fund employees' 401(k) accounts since the HR person was on vacation. Hmmmm. Err, OK. That makes sense. Actually, it doesn't. They made the deduction from my salary but sat on the cash? That doesn't strike me as particularly fair.

Still, since this doesn't typically happen, I'll let it slide, I guess.

Our VP of Finance asked me how I found out that the account was never funded. He was pretty surprised to hear that I keep an eye on all my accounts through the magic of Quicken. I got my eye on you, dude. Stay away from my cash.

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Shopping to Save the World

A couple of days ago as we were eating a family dinner, my dad pointed out a "save the rain forest" promotion on a box of Tropicana Orange Juice. According to Tropicana, they will protect 100 square feet of rain forest, every time you enter a code you find on a box of Orange juice. I am pretty ambivalent about such promotions. On the one hand, there's nothing wrong with raising awareness of environmental issues. On the other hand, I feel such promotions have a healthy dose of green washing in them. Marketers these days are trying to sell us on the notion that we can shop our way to a cleaner world and a healthy environment, when truth is the exact opposite. It's our consumerism and shopping that is driving the planet to the brink of environmental disaster.

All manners of car companies, from Toyota to Ford are now advertising their hybrid vehicles as environmentally friendly. Even energy companies - read "oil companies" - are now trying to sell us on the notion of their products being more environmentally friendly (see this campaign from Chevron for example). However, reality happens to be in the exact opposite direction: nothing you buy will improve the environment. Nothing you buy will slow down global warming. If the environment is on your mind, buy less, not more.

True, there are some products that are more environmentally friendly than others. Hybrid cars certainly require less gas than a "light truck" or SUV. So if you must have a car, definitely go for one that will have a smaller negative impact on the planet, but don't delude yourself into thinking that you are actually improving the environment. You are only doing less damage than you would otherwise. Still, there are some exceptions. If you buy a product that reduces your net impact (e.g. a compact fluorescent light bulb to replace a regular light bulb), you are, in fact, creating a net positive change. That's a good thing.

Drinking orange juice to save the planet? Drinking tap water would be better, and would also save you money. That's not to say that you shouldn't drink orange juice, only that you shouldn't tell yourself comforting lies about why you're doing so.

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Contingency on the House Lifted...

Can't back out of the house purchase any more. Last night we lifted our contingency...

Looks like this thing is happening for real.

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The Letter That Got Us a House...

Last week I promised that I would publish the letter I wrote to the sellers of the house we are buying and which proved effective in getting our offer accepted. Well, I have been traveling on business and running around doing everything to get this house thing off the ground (who knew it could be so complicated?) - so there was not much posting going on last week. This week promises to be pretty sparse as well, but in the mean time, here is a copy of that letter I wrote. What can I tell you, it worked...

For obvious reasons I am editing out some specific sensitive or identifying details.

"Mr. & Mrs. [Seller],

I would like to propose a win-win transaction.

As you know, my wife and I are interested in buying your house on [name of street], however we have been unable to afford your asking price. At the same time, your house has been on the market for several months, and you have not yet been able to find a buyer willing and able to pay the price you are asking.

In an effort to find a way to purchase the house, we have been able to arrange for additional financing, from our family. If you would be able to accept an offer of [purchase price], we can send you a formal and detailed offer (incl. applicable contingencies) in short order.

Prior to sending you an offer, we would, at our expense, have the house inspected. Assuming the inspection did not turn up any issues which we considered material, we would be able to buy the house in “as-is” condition, subject to the applicable contingencies.

Please understand that we are not trying to negotiate a bargain here. We are offering you as much as we can afford to offer, after having exhausted all of our available funding sources.

With due respect, and in an effort to allow us both to get to a satisfactory agreement, I would like to point out a few reasons that I think the arrangement I am proposing would be beneficial to both parties:

a) Government Incentives – the government’s tax credit for first time home buyers is set to expire in less than 2 months. While this is now creating more buying activity, once the tax credits expire, fewer buyers will be on the market. Since we need to take advantage of this tax credit, we must buy our house before the tax credits fade out;

b) Conforming Loan Limits – as you may know, the government temporarily increased the conforming loan limits. These increased limits too are about to expire, and once they do, mortgages will become much less affordable and therefore demand will decrease. Again, we must purchase a house before these limits revert down;

c) Financing Costs - in the months that your house has been on the market, you have no doubt incurred substantial financing costs. I may be wrong, but I believe that even if you choose to rent the house you may find it hard obtain a high enough rent to cover your mortgage costs;

d) Overall Market – the tech stock bubble burst in 2000, when the NASDAQ briefly exceeded 5000. Nine years later, the NASDAQ index stands at 2018 points. Although we might all wish differently, once a bubble burst, many years can pass before assets recover to their former prices. It is more likely than not that real estate prices will also stagnate for years before showing any significant improvement.

Mr. & Mrs. [Seller], my wife and I need a place to raise our family. We love your house and would like to buy it. We believe that given the market conditions, we are proposing a fair deal.

I hope that you agree.

Respectfully,

Shadox"

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The Curious Story of How Our House Offer Got Accepted

We first bid on our prospective house back in Mid August - almost a month ago. Our first low ball offer was rejected, as I had anticipated, but since the house was being offered for 10% above our budget, we had no choice but to walk away. Or so it seemed.

After our original offer was rejected we kept watching the house online. A couple of weeks had passed and the house was still on the market with no offers. I asked our realtor to go back to the sellers and see if they might change their mind about our original offer. They agreed to reduce the price by $20K. This was still too high for us, and I contemplated the idea of asking our realtor to try to set up a face to face meeting between me and the sellers, in which I would attempt to get them to see the light. This would have been a fairly unorthodox move, and I ultimately decided to do something less aggressive, but potentially more acceptable.

I decided to write a letter.

What prompted me to write this letter was a conversation with my dad. He pointed our the fact that the asking price was now a mere few percent above our budget, and he told me that in his opinion giving up on the right house for such a small deviation from the budget is ridiculous. He did not beat around the bush with his commentary. Finally, he offered to make up the difference between our budget and the final purchase price.

I agonized over this decision for about 24 hours. I hate accepting money gifts from others, but I realize that this is a stupid thing. My parents really want to help, and helping me gives them pleasure. In addition, they can afford to help. I am not taking food or luxury from them by accepting their gift. I decided to go for it.

Tomorrow, I will share the full letter I wrote to the sellers (minus identifying and sensitive details). The sellers had already taken the house off the market, but after receiving our letter, they agreed to reduce the price by an additional $20K and to do the deal. There is, however, a little twist to the story which I will share with you in a few days.

Later this week: inspections galore. House inspection, roof inspection, termite inspection. The whole 9 yards. Unfortunately, Alpaca will have to deal with these on her own as I will be traveling on business...

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The House - It Is Happening

Yesterday: talked on the phone for hours with mortgage brokers and lenders. Made a choice. Looks like we will be able to get a very nice rate, as in "5%", if all goes according to plan. Also made a late night (10PM) trip to the house, with my realtor, to take pictures of the house inside and out before finalizing the contract this morning. Also while at the house, I got to meet the sellers - which seem to be very nice people. They gave me lots of good information about the house - e.g. the windows are all low e, per city code. Means lower energy bills sweet. Also, the fig tree in the yard will HAVE to go. The mess it's making is insane.

Today: visiting the mortgage broker to get the paper work started. Alpaca will be visiting day care centers for the little ones. The school district is refusing to tell us whether our oldest son, a second grader, has room in the school closest to our proposed new house. They claim this is "district policy". Imbeciles. I hate bureaucrats. What could possibly be the rationale for such a stupid policy?

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HUGE Developments on the House Hunt Front

We don't yet have a formal contract, but we have agreed on a purchase price for a house - this is the same house we originally bid on, but could not agree on terms.

As you can imagine, this now has me preoccupied. Details to follow, including the full story of how we got this done and why. This was not a straight forward thing.

Still some obstacles in the way. Stay tuned.

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Recommended Reading: Economics & Healthcare

Over this long holiday weekend I read a number of excellent articles on the topic of healthcare and economics. I would like to recommend them to you:

The first is an article published by the NY Times by Nobel Prize Winning Economist Paul Krugman titled How Did Economists Get So Wrong. Essentially this is an article explaining the problems with macro-economic theory. Don't let the subject fool you, the article is very accessible.

The second is an article by David Brooks, also of the NY Times, titled Let's Get Fundemental, in which he advises President Obama on how to reform the healthcare system. The man always offers sound, coherent and calm advise. Highly recommended.

The third and final recommendation is an article published by The Atlantic, titled How American Health Care Killed My Father. Here's a brief quote from the article:

Keeping Dad company in the hospital for five weeks had left me befuddled. How can a facility featuring state-of-the-art diagnostic equipment use less-sophisticated information technology than my local sushi bar? How can the ICU stress the importance of sterility when its trash is picked up once daily, and only after flowing onto the floor of a patient’s room? Considering the importance of a patient’s frame of mind to recovery, why are the rooms so cheerless and uncomfortable? In whose interest is the bizarre scheduling of hospital shifts, so that a five-week stay brings an endless string of new personnel assigned to a patient’s care? Why, in other words, has this technologically advanced hospital missed out on the revolution in quality control and customer service that has swept all other consumer-facing industries in the past two generations?

We are all wrapped up in the big political fights over health care, but perhaps there is much to be done even with simple common sense and a little bit of innovation and openness.

And one more:

"Indeed, I suspect that our collective search for villains—for someone to blame—has distracted us and our political leaders from addressing the fundamental causes of our nation’s health-care crisis. All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value."

I strongly recommend you read this well written article for yourself.

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Frequent Flyer Miles - Good for Nothing?

My company will be shutting down for 2 weeks in December - I hate these forced vacations, but my CEO believes that if he's on vacation no one is working... Anyway, since I am forced to take a vacation, I was hoping to take the family somewhere. Hanging out around the house with 3 kids? Not fun. So I started looking for some places we can fly to using frequent flyer miles, and since I have about 500K miles on United and Continental, I have miles to burn.

Not so fast. Using miles to fly somewhere for the holidays is not a very doable project, apparently. I haven't been able to find anything so far, although I have not given up quite yet.

So, are those frequent flyer miles really useless? No, not really, although using them to fly places with multiple people is pretty much impossible these days. So what can you do with frequent flyer miles?

Buy Stuff - I recently bought a nice little pocket camera using my United miles, and the year before I bought a Roomba vacuum cleaner.

Read Stuff - I never pay for my magazine subscription anymore, I just use miles to get them. Same goes for my Wall Street Journal, even though I recently allowed that subscription to lapse. I need a little break.

Fly in Style - although I haven't had much luck paying for family vacations with miles, I have had more luck upgrading myself to business class on occasion. I typically only do that when the alternative is to be stuck in a middle seat somewhere.

Travel in Relative Comfort - unless you are in business class, there is no such thing as flying in comfort on an American airline. That's not the case everywhere. Try one of several Asian airlines (e.g. ANA) and you'll understand what kind of crappy deal we're getting here in America. However, the most important use of miles from my perspective as a frequent business traveler: earning status with your chosen airline. Nothing sucks worse than having to check your luggage when traveling on business. By having status on an airline, I get to board the aircraft early, thus ensuring that I have enough space for my carry-on, even if I am stuck in an uncomfortable seat only fit for people under 5' tall.

You want to hear about a really useful loyalty program? Hotel loyalty rewards. These are like frequent flyer programs' less famous but more talented step-brother. For years I ignored these loyalty programs, but have recently started concentrating my business stays at either Marriott brand hotels or Holiday-Inn brand hotels. Those rewards are easier to collect & easier to redeem for free rewards (such as free hotel stays) than airline miles. Viva la free stuff!

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The House Hunt Continues

Another week and the house hunt continues. So what's new? Not enough, unfortunately. We have yet to put down another offer on a house after our first and only attempt failed. There were a few interesting developments though:

Limited Supply - I would think that in this kind of market there would be a larger supply of homes for sale. Strangely, in the areas where we are looking only a couple of new houses that broadly fit our needs come on the market every week. Last week I ran across some statistics that showed that the average time houses were spending on the market in Santa Clara County (where we are house hunting) is over 80 days... Maybe people are sitting on houses if they can afford to wait out the buyers market. If that's their strategy, I think they will have to wait for a long time.

More Open Houses - nevertheless, this weekend we went to a couple of open houses. One of them, which looked good on paper - had 5 bedrooms. Of course the listing didn't mention the fact that two of those bedrooms were literally under ground... one of these underground rooms actually had a small window that opened up underneath the deck in the yard... It is really quite amazing to me what crazy layouts some of these houses have. The other house we saw was too small for us, was over 50 years old and looked like it was never remodeled. It also smelled like an ashtray. We ran out of it in about 3 minutes.

Haven't Given Up Yet - remember that house we put an offer on? Well, it still hasn't sold and we asked our agent to go back to speak with the sellers' agent to see if anything could be done. Last night our agent called me back saying that the sellers are willing to reduce their price by $20K below their previous counter-offer, but that this was their best and final offer. They would also expect us to take the house as-is. If we decline and they receive no other offers, supposedly this weekend they will be taking the house off the market.

This is a really excellent house and at the price it's being offered it's probably a good long term buy. The only problem is that this latest offer is STILL about $50K above our budget. We simply can't afford it.

I am entertaining the idea of a final hail Mary. Perhaps I'll ask our agent to try to set up a meeting for me with the sellers' agent. Yes, it's unorthodox, but what do I have to lose? The house has been on the market for nearly 5 months, and has not garnered any offers. Holding the house - which was no doubt an investment property - is only going to generate further losses for the sellers. There is no way that they could rent the place at a price that will cover their financing costs and taxes on the place, plus a rapid increase in prices is really unlikely to happen any time in the next several years. Look at where tech stocks are 9 years after the tech bubble burst...

It's not that I am trying to negotiate hard, we simply cannot do the deal at the price that is being asked, and apparently neither can the sellers. The market is telling the sellers that their asking price is not right, but they are refusing to listen. I think there is a win-win deal to be had here, if the sellers accept the new reality of the market.

Maybe I can get them to see the light on this, but I am not betting on it.

Any advice, ideas and suggestions would be appreciated.

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This is No Way to Find a Job...

Yesterday I received the following unsolicited e-mail to my work address:

"Good Morning [Shadox],

Thank you for the consideration. I apologize; this is the first time since I graduated from college that I am actively looking for a new sales opportunity. Typically I have networked my way up during my career. I am sure you know more than most about the current conditions in the economy. I am also sure I am not the only sales professional on top of their games looking for other opportunities. This was my creative way to make connections with other professionals like you to get an understanding of what is going on out there.

Suffice it to say, is there anyone that you would like to introduce me to that I might be able to help in a similar or even greater way?"

The e-mail also included an attached resume and a request for a phone call.

Here are a few thoughts on the topic:

The guy clearly showed initiative. I don't know him, and never heard his name, but he made an effort, got my e-mail address from someone and threw a Hail Mary. Of course, he didn't quite connect.

The bottom line is that I never opened the resume, nor would I consider taking the call. There are several reasons for this, but I'll only give you one: I'm too busy. I am an executive and I spend my days (and much of my evenings) running around trying to get things done for my company. If there is no compelling reason to take on a work related task, I don't take it. There's just not enough time in the day to finish everything that I would like to accomplish.

Second, I think that this guy is pretty lazy. I mean, I am guessing this is one of many e-mails that he sent to several or maybe even hundreds of executives. Would I hire someone based on an e-mail solicitation? Except for the fact that I used his e-mail as a topic for my blog post, I treated this e-mail solicitation just as I would any other piece of SPAM, and no, I don't want to buy Viagra, thank you very much.

I don't want to knock a guy who is clearly feeling stressed and desperate to find a job. Believe me, I respect the sentiment and appreciate the initiative. Alpaca (my wife) is also still looking for a job. However, let's think about this from a utilitarian perspective for a second. I think that this guy would have done dramatically better for himself if instead of sending me a blind e-mail, he had asked someone to introduce him to me. If one of my acquaintances had asked me to take a call, I would probably agree. That's the way these things work.

Bottom line, on the efficacy front, I bet this basically yielded zero results, even if hundreds of e-mails were sent as part of this "campaign". When you're looking for a job, results are all that counts...

In this kind of job market, the only reliable way to get a job is to network your way into one. It's tough. Some people consider it nasty. But it's the only method that stands a chance in an economy where jobs are very tough to come by. That, or get very lucky. I guess some people choose to roll the dice.

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