Are They Smarter Than Us?

People who are good with money are truly different from the rest of us. Know why? They use tax code to their advantage in ways the rest of don’t even know about or take the time to learn.

One example of this – they take the equity in their home, financed at a lower interest rate, then invest the it in tax-deferred accounts, according to a new study.

In other words, they are getting a tax break on both sides of the deal.  These investors deduct the mortgage interest on their tax returns and then sit back and watch their money grow tax-free.

The study found that taxpayers who itemize were more likely to have high mortgage debt and they also found that investing in a tax-sheltered retirement account was related to higher mortgage debt.

The results seem to indicate that the more sophisticated households are responding to government tax incentives by borrowing against their house and investing in their 401(k).

There’s nothing illegal here. The government has created this incentive.  It’s a wonder why even more people don’t take advantage of this this setup.

But is this a good idea to risk your home equity?

The downsides

In some ways, it’s not a good idea. For instance, the incentive — the mortgage interest deduction — that encourages homeowners to borrow against the value in their home results in this potential problem: It appears to encourage greater housing leverage and vulnerability to housing price shocks. Indeed, “there is increasing concern, especially in light of the recent housing crisis, that rising mortgage debt among older households is a prelude to foreclosure or financial distress during retirement.

Plus, you are more vulnerable to income shocks. If you lose your job at age 58 and you’ve got extensive mortgage debt and you’ve got all your money in sheltered accounts it might not be so easy to take your money early out of sheltered accounts to pay your mortgage every month.

What’s more, you could lose on both bets. The value of your house could decline along with the value o your 401(k), which is exactly what happened staring in 2006.  If you are in your late 50s, having an extensive proportion of your retirement savings invested in equities funds is the rational thing to do,” said Finke. “It just didn’t work out very well in 2008 and 2009.

Another potential downside is this: If tax law changes, especially the mortgage interest tax deduction, then you’ve got a little bit of risk there.

And finally, there’s the risk that you won’t invest the borrowed money in a sheltered account. Paying down one’s mortgage is an example of thrift and sound financial decision making.  And that’s essentially a behavioral argument That is saying that people are able to accumulate wealth passively by paying down their mortgage. And, if you encourage people to start pulling money out of their house they might then spend it on things that are not in their long-run best interest. So, you also have to consider when you pull money out of your house, are you really going to invest it in a sheltered account or are you the kind of person to buy an RV and deplete your wealth right before you need it the most in retirement.

The upsides

One positive, however, is this: When you look at your total portfolio, not just your financial assets, but the entire portfolio from which you plan to fund your retirement, you’ll find that taking on more mortgage debt changes your overall asset allocation in ways that might be beneficial.

As we age, we tend to accumulate home equity which is essentially increasing the bond share of our portfolios.  Borrowing against this home equity allows us to maintain our optimal portfolio balance of stocks and bond-like assets.

The home equity, Finke said, is not providing you the same kind of upside potential as an equity portfolio will.  What an economist would say is that you should have a rational allocation of your household wealth in bonds and equities. But what happens over time, with your home is that you are essentially investing more and more in a bond-like asset. And, so, by simply paying off your mortgage you’re investing more and more in a bond. And it may be rational for you, especially if you are in your 50s to be shifting some of the wealth into the stock market.

In practice

So what if you decide lever up your home and invest in retirement accounts?  Make sure you’re in a position to maintain your mortgage payments should you suffer an income shock. You’re exposing yourself to a certain amount of risk so you want to make sure you have enough in emergency funds to make your mortgage payment.

The present system encourages upper income households to increase their leverage and that could make them more vulnerable during a recession. If they lose their job, they may also lose their home.

The Ultimate Aphrodisiac? What a Third of Women and 18% of Men Say is a Big Turn On!

Is this true?  Is this true about Seattle?  When it comes to dating, homeownership can be the ultimate aphrodisiac.

In a survey of 1,000 single people, more than a third of women and 18% of men said they would much rather date a homeowner than a renter.

Only 2% of women said they preferred to date a man who rents, while only 3% of men said they would choose a woman who rents over one that owns her home, according to the survey, which was conducted by Harris Interactive for real estate site Trulia.

Both sexes also clearly prefer it when there’s no roommate in the picture; 62% of survey respondents, men and women, prefer to date singles who live alone.

How do you feel about it?  I know for myself, a woman that chooses to have a man in her life vs. “needs” a man is wonderful.  Many of you know that one thing I found exciting about Robin was the fact she was investing in single family properties . . . as a single mother of three!  She had more guts than I did.  And she was doing well at it.

I’d love your thoughts on this.

Top 10 Cities: Green Living, Health, Air Quality and Other Stuff!

Top 10 Overall:

• San Francisco
• Washington, D.C.
• Seattle
• Boston
• New York City
• Minneapolis
• Denver
• Portland, Ore
• Los Angeles
• Chicago

These cities earned the highest combined scores. In order to earn a spot on this list, cities had to rank highly on positive lists (such as “best public transit”) and rank low or not at all on negative lists (such as “worst allergies”).

Top 10 Most Frequent List Appearances

• New York
• San Francisco
• Washington, D.C.
• Seattle
• Boston
• Minneapolis
• Denve
• Los Angeles
• Chicago
• Miami

These cities showed up most frequently on the lists featured in Scientific American’s top 10 cities lists for the past four days (green living, health, air quality, technology). New York City, the overall winner, appeared on more than 60 percent of all the collected lists, whereas the cities that tied for second earned spots on almost half the lists; the third-place cities showed up in the rankings about 30 percent of the time.

Not all of the lists on which these overall scores are based were created using conventional statistical or scientific methods, therefore their validity should be suspect. We have presented this information mainly for discussion. Scientific American gathered the lists from several online sources. To earn a place on the “overall performance” list, cities had to appear on multiple lists, and earned points based on their rankings. Each city’s points were added up to arrive at the overall score. A high rank on a positive list such as “best public transit” earned a city points whereas a spot on a negative list such as “worst allergies” detracted points. Each city’s points added up to its overall score.

What do you think?  I can speak for a couple of these cities.  How about you?  I’d love your comments.