Octavo Dia

Monday, October 31, 2011

How to Make a Modern Mortgage

A couple of days ago I heard on the radio that people very rarely pay off mortgage anymore--the WWII generation was the last generation to pay off their mortgages in significant numbers. At first I thought it was just another indicator of how lax we are, but then I thought that it actually made sense.

First of all, people rarely spend 30 years in the same place. The people who are paying off mortgages today purchased their homes when I was born. In those 30 years I've lived in six states and one foreign country. Since people are more mobile, paying the same mortgage for 30 years isn't really an option.

Second, people who would be paying off mortgages today took out those mortgages when interest rates were much higher. It would be foolish of them not to have refinanced to much lower rates. And when they refinanced, they probably did so to another 30-year term. Which leads me to my third point...

Third, refinancing, or buying a new house with a new 30-year mortgage, better meets people's time preferences of money. If you pay of a mortgage the old-fashioned way, 30 years from now you'll have a LOT of extra money. If you refinance to a new mortgage, by spreading the principle over so many extra payments, you reduce the amount your paying now. So instead of a lot of money later, you have a little more money now. I've heard this concept described as stealing from yourself when you're poor to give to yourself when you're rich. Better to use the money when you need it (when you have a mortgage) than to wait until your need for money is vastly reduced.

The problem with all of this is that houses are still too expensive proportionate to our current income to be purchased in the time frames our lifestyles provide. I've seen numbers ranging from five to ten years as the average length of time between moves, all of which are only available in ARM mortgages, which isn't the same.

I know many people would prefer that real estate ownership be left to professional landlords, as the small-business aspect of homeownership unduly reduces people's mobility. However, barring that, here's what I think a modern mortgage should look like:

  • You have a single mortgage that you take out to purchase a residence. This mortgage can follow you from property to property throughout your life--it's tied to you, not to a particular piece of real estate.
  • Your mortgage is adjustable in BOTH interest rate AND principle. If you want to purchase a more expensive residence than your mortgage and equity can cover, they can loan you more. If you purchase a less expensive property, you can put the extra into equity. The interest rate can fluctuate (you can set rules, like it can only vary so much year-to-year, for example).
  • Your mortgage is interest-only forever. Rather than having a set term, you pay only the interest, taxes, and fees every month. If you decide to pay off some of the principle, your next payment will be reduced, as you'll have less interest to pay.
As a result, you'd have a mortgage that fits modern lifestyles and people's time preferences for money. You could build equity as you saw fit, moving from apartment to condo to house and back again.

Thursday, October 20, 2011

Know Your Audience

Two economists were walking down the street. One sees a dollar bill on the sidewalk and stops to pick it up. "That bill's counterfeit!" says the other economist, "If it were real, someone would have picked it up already!"

In unrelated news, a £250,000 Wolfson Economics Prize was announced yesterday.

Friday, October 14, 2011

Comparative passport ownership

Many are the articles, such as this one, that decry low levels of passport ownership among Americans as symptomatic of an insular mindset. I think a more likely cause is the sheer size of the United States--you can't really compare the U.S. to other countries in terms of passport ownership. The other largest countries geographically all have their numbers skewed in some way. They have repressive governments, are very sparsely populated, or or just too poor to support much international travel.

As a result, the United States is compared to far, far smaller political entities which do not share our geographic breadth. If the states were separate countries (and most of them are comparable in size to European countries), the United States would have almost universal passport ownership--I don't believe I know anyone who has not traveled to a different state.

So take that Europe. We're not insular; we're just huge and free. I predict that in the Schengen Area levels of passport ownership per capita will begin to fall, but you know that there will be nary an article decrying the insular nature of non-passport bearing Europeans.

Sunday, October 09, 2011


Whenever I read an article like this: Knocked Up and Knocked Down: America's Widening Fertility Class Divide is a Problem, it always makes me think of 1 Corinthians 1:27-9:

"God chose the foolish things of the world to shame the wise; God chose the weak things of the world to shame the strong. He chose the lowly things of this world and the despised things—and the things that are not—to nullify the things that are."

I know I've said and argued many things similar to that article, e.g., "Stupid people shouldn't breed." I should have been ashamed to say it. Who am I judge that which God has chosen?

Saturday, October 08, 2011

Why the United States Needs an Out-Sized Military

As a means of negotiation, a war conducted by rational actors continues until both sides come to a mutual understanding of the other's military strength and willingness to continue fighting. Once this mutual understanding is reached, negotiations will be pursued by both sides and may be satisfactorily concluded.

Military strength and political willingness, though both necessary, may to a certain extent be substituted for the other in a given war. In the Vietnam War, for instance, the Vietcong and North Vietnamese made up for their lack of equipment by a willingness to continue the war for as long as it took. The current U.S. military posture is an example of the other side. We have overwhelming military strength, because we do have sufficient political willingness.

In short, the U.S. needs an out-sized military so it can win a war with a minimum of political commitment. If we face an opponent who can withstand our initial onslaught, we lose.

Tuesday, October 04, 2011

How to Fix DC Traffic

In my eight months in DC, I've commuted to work by bus, metro, car, private shuttle, and by carpooling with strangers (a.k.a. slugging). The only major transit option I've not used is the train, mainly because it's a good 20 minutes slower than slugging. With my vast experience in commuting, I can make one definitive conclusion: they're all full. The roads are full, the buses are full, the slug lots are full, the metro is full, the shuttles are full, and I've heard the trains are full too.

The long-term solution would be to lift DC's height restrictions. In the short term, since alternative work schedules are already popular, there's not much that can be done to reduce the rush hour flow. Therefore, building more capacity is paramount. The trouble is that, while you're building this capacity, there's no where for the diverted traffic to go. For example, you can't move everyone onto buses while you widen a metro tunnel because the roads are full! You have to be able to build capacity without disrupting traffic flow so that you can undertake projects that do disrupt traffic flow.

So here's my plan:

First, build another few slugs lots. Since many lots are full half-way through rush hour, this would encourage more people to slug, especially since these lots will be more convenient for some. It would also encourage more alternative work schedules. However, the HOV lanes are often full once near the city, which leads to the next step:

Second, lengthen the restricted times on the HOV, and provide a variable minimum capacity depending on the time. During the peak rush hour commuting time, instead of the standard 3+ occupancy, you change it to 4+. This should put a lot of cars into the extra slug lots. This would make the HOV a much more viable option, but the roads would still be clogged, which leads to the next step:

Third, establish a rush-hour toll on the non-HOV lanes. Besides encouraging more people to slug and take buses (whose capacity could be upgraded rapidly), this would then fund the upgrades to other things, such as:

Fourth, add express trains/tracks in the metro. The outer metro stations are under-utilized because it takes so long to get there with all the stops in between. Instead, send an express train straight to the farthest station on the line (or the city center). People a couple of stops short of that could then board a regular metro train to get to their station. This would also use the under-utilized reverse direction trains, e.g., the p.m. inbound.

Fifth, once they have money and spare capacity, I'm sure they can think of other things that need upgrading.

So in short, you maximize the use of the cars that are already going in, charge the people who drive by themselves during rush hour, and use the proceeds to fund the expansion of other mass-transit options. That's my plan, anyway. Incidentally, expanding slugging opportunities plays right into my preferred mode of commuting.

Monday, October 03, 2011

How to Deport Illegal Immigrants without Harming the Economy

Every time the issue of illegal immigration comes up, some op ed columnist says something like, "We can't deport that many people without destroying our economy!" For that argument to make sense you have to be either stupid or extremely unimaginative.

Large deportations of illegal immigrants would only harm our economy if you did not replace them. If, for every illegal you deported, you admitted one additional legal immigrant, you would find that not only would the economy not be harmed, it would positively benefit as an immigrant with legal protections who can fully participate in society will produce far more than could ever be recovered by the exploitation of an illegal.

All immigrants are not created equal. Deport the illegals, replace them with legals, and everyone will be better off.