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You will never own Real Estate

Its ok, I was there too. For a long time, I hoped and schemed that I could own a home with some property some day. But after spending a exorbinate amount of time (some may even call it obsessing) researching Real Estate, I know that it is an impossible dream. And I see the world, and especially the United States of America very, very differently.
“Bah” you say “I own my home! And I am damn proud of it!”
And to this response, I would argue that there is already a profusion of subterfuge about the very definition. So first we have to quantify what home ownership actually is.
Is home ownership an interest only loan, where the borrower takes out a  125% LTV suckers loan? On their dream property, in order to not have to put anything down?
Is home ownership a 30 year fixed rate mortgage. With the stabibilty in knowing what your monthly is never going to change over the life of the loan?
Or is home ownership when you finally pay of the mortgage, and you owe nothing more to the lender?
(I realize that there are many other financial instruments that we could list concerning housing. But for the sake of argument, I believe that these three represent a solid scale on which to reflect.)
So back to the question at hand. Which of these represent the term “Home Ownership”?
Now the first one is fairly easy to rule out these days. Most everyone has seen these loans explode and so lets just scratch it off the list.
The second one, is probably what the American populace would define as home ownership. But for now, everyone who is reading should be realizing that when you take out a loan on a home, it is actually the bank’s and not yours. So scratch number two.
At this point, most folks would settle on the definition of home ownership. Which is when you own the deed/note flat out, owing nothing to any lender. But if that were the case, then this post would be over. And my take is that most people forget about one very important aspect.
Taxes.
Yeah, good ol’ taxes. And here is where I reason that you never truly own your home. That at any point, the goverment can come and weasel your property away from you. And don’t give me the I have rights bull crap. This only goes as far as the illusion’s need. And if the need is great enough, the illusion falls right along with your rights. It is also my belief that the government is going to do whatever it can to increase taxes over the next decade (just the next decade?). I mean, face it, our nation is broke. We owe a crap load, to a lot of people.
But the land, the land is the real value!
Heh, right, the land. Is it on anything of value that can be sold on the world stage? If not, then I really don’t want the “value”. Especially the taxes that come with it.
So what I have been doing personally is realigning my goals. Understanding that a home, in an of itself, is a depreciating asset at best. And at worst, a depreciating liability when the note is held by a lender. At some point, you will have to invest your reserves into either fixing and maintaining, or all together rebuilding the home (disturbingly similar to a car, no?). And I do not want to be owned by my things. I will not sacrafice myself and my families’ opporutnites in order to make the pipe dream of home ownership into a ball and chain reality.

Its ok, I was there too. For a long time, I hoped and schemed that I could own a home with some property some day. But after spending a exorbinate amount of time (some may even call it obsessing) researching Real Estate, I know that it is an impossible dream. And I see the world, and especially the United States of America very, very differently.

Bah” you say “I own my home! And I am damn proud of it!

And to this response, I would argue that there is already a profusion of subterfuge about the very definition. So first we have to quantify what home ownership actually is.

  1. Is home ownership an interest only loan, where the borrower takes out a  125% LTV suckers loan in order to not have to put any cash down? (On their dream property of course)
  2. Is home ownership a 30 year fixed rate mortgage. With the stability in knowing what your monthly is never going to change over the life of the loan?
  3. Or is home ownership when you finally pay of the mortgage, and you owe nothing more to the lender?

(I realize that there are many other financial instruments that we could list concerning housing. But for the sake of argument, I believe that these three represent a solid scale on which to reflect)

So back to the question at hand. Which of these best represent the term “Home Ownership”?

Now the first one is fairly easy to rule out these days. Most everyone reading this has seen these loans explode. Either by watching family or friends, or experiencing it themselves. And so lets just scratch it off the list.

The second one, is probably what the American populace would define as home ownership. But for now, everyone who is reading needs to understand that when you take out a loan on a home, it is actually the bank’s and not yours. So scratch number two.

At this point, most folks would settle on the definition of home ownership. Which is when you own the deed flat out, owing nothing to any lender. But if that were the case, then this post would be over. And my take is that most people forget about one very important aspect.

Taxes.

Yeah, good ol’ taxes.

And with taxes in mind, here is where I reason that you never truly own your home. That at any point, the goverment can and will come and weasel your property away from you. And don’t give me the I have rights bull crap. These illusionary rights only go as far as their (the government’s) need. And if the need is great, the illusion falls right along with your rights.

But the land, even despite the taxes, the land is the real value!

Heh, right, the land. Is it on anything of value that can be sold on the world stage? If not, then I really don’t want the “value”. Especially the taxes that come with it. It is also my belief that the government is going to do whatever it can to increase taxes over the next decade (just the next decade?). I mean, face it, our nation is broke. We owe a crap load, to a lot of people.

But don’t worry, it is nothing to be afraid of, you just need to understand it. Once you realize that with most current home purchases you are only buying the “right” to further taxation, you are good.

I mean, think of it this way. Do you think I sat there after my brother died thinking

“Man, I am glad that Jaye got to see our new place before he passed away!”

Hell no!!!

I was happy that we had the money to make memories with him by going on trips and other awesome adventures through out his life.

And so the target must be ”buying” a home when it becomes less expensive than renting while projecting future tax increases into the model. Along with the understanding that a home, in an of itself, is a depreciating asset at best. And at worst, a depreciating liability when the note is held by a lender. At some point, you will have to invest your reserves into either fixing and maintaining, or all together rebuilding the home (disturbingly similar to a car, no?). And even with this, you must know emotionally that it will never be truly yours. And this is a good thing.

I personally do not want to be owned by my things. I will not sacrifice myself and my families’ opportunities in order to make the pipe dream of home ownership into a ball and chain reality. I plan on using my surplus cash to MAKE MEMORIES!!! That is the real value.

Despite these current beliefs, I am always open to new ideas. Because you can’t learn something new if you are not willing to listen right? And I appreciate people’s thoughts, even if I don’t always agree. So I would be happy to hear other’s perspective on this. And so I leave you with this.

“Why do you personally want to own a home?”

The intuition of Benford

Have you heard of Dr. Benford? What’s that you say? You haven’t? Well don’t worry you are not alone. Most people haven’t heard of the guy either, but it would be my advice to most anyone (especially business owners) to Google him.

You see back in the 1930s, Frank Benford was working away as a physicist. And being a physicist, he had to use a lot of math. And for the simple math, he would look up the answers in what is known as a book of log tables. (Now days we would just use a calculator but obviously it had yet to be invented)

For example, this could be how the book was laid out.

Pages 001-100 dealt with math problems starting with the number #1
Pages 101-200 dealt with math problems starting with the number #2
Pages 201-300 dealt with math problems starting with the number #3
Pages 301-400 dealt with math problems starting with the number #4
Pages 401-500 dealt with math problems starting with the number #5
Pages 501-600 dealt with math problems starting with the number #6
Pages 601-700 dealt with math problems starting with the number #7
Pages 701-800 dealt with math problems starting with the number #8
Pages 801-900 dealt with math problems starting with the number #9

Anyway, after several years of work, he started to notice something. Benford noticed that he used the pages at the front of the book a lot more than the ones at the back. Which means that he was doing the majority of his work with numbers that began with either 1,2, or 3. And this troubled him.

Am I a bad physicist? He thought. Am I only using a subset of the tools that are available?

And after several years of statistical work, Benford came to the conclusion that numbers seemed to form a pattern in most (but not all) logarithmic systems.

Numbers that began with #1 were used 30.1% of the time
Numbers that began with #2 were used 17.6% of the time
Numbers that began with #3 were used 12.5% of the time
Numbers that began with #4 were used 9.7% of the time
Numbers that began with #5 were used 7.8% of the time
Numbers that began with #6 were used 6.7% of the time
Numbers that began with #7 were used 5.8% of the time
Numbers that began with #8 were used 5.1% of the time
Numbers that began with #9 were used 4.6% of the time

Now, I know what you are thinking.

Jared, what the hell does this have to do with me?

And so here it is, in two words. Fraud detection.

That’s right, you can apply Benford’s law to most anyone’s financial books, and it will help detect if fraud is taking place.

Really?

Yes really! Take this little nugget from Wikipedia.

In 1972, Hal Varian suggested that the law could be used to detect possible fraud in lists of socio-economic data submitted in support of public planning decisions. Based on the plausible assumption that people who make up figures tend to distribute their digits fairly uniformly, a simple comparison of first-digit frequency distribution from the data with the expected distribution according to Benford’s law ought to show up any anomalous results.[5] Following this idea, Mark Nigrini showed that Benford’s law could be used as an indicator of accounting and expenses fraud.[6]

In the United States, evidence based on Benford’s law is legally admissible in criminal cases at the federal, state, and local levels.[7]

Benford’s law has been invoked as evidence of fraud in the 2009 Iranian elections.[8]

Pretty cool right? And please keep in mind, this is just one of many tools available to detect fraud. But for someone like myself who is responsible for large Oracle databases that process millions and millions of financial transactions a year, it is really nice to be able to use Benford’s law. It won’t actually solve any issues, but it will help raise those needed RED FLAGS. Not to mention the nerd in me had a lot of fun writing the algorithm :-)

So, to all you business owners who worry that someone is screwing with your money, it may be helpful to apply Benford’s law to your books, and see what pops up.

For the record, this it not legal advice, plus my field is computer science so this is more of a nerd out topic for me.

And here is a book with interesting information that I enjoyed reading (link)

Radiolab recently did a story on Math featuring Benford’s law (link)

Kaypro

Author’s note: This is a story I wrote for my Dad a while ago. I found a digital copy on an old hard drive I was destroying throwing away. I thought about editing the story, cleaning it up a bit. But it seemed like I would be killing the memory of seeing my Dad read it for the first time. I know he enjoyed it. So without further ado.

Back in 88’ my father, my brother Jaye (age 5), and I ( age 8 ) played a game called Ladder on an old original laptop computer called a Kaypro. We collectively tried to beat each other’s high score. The goal of ultimately getting and keeping the top score was a daunting task, each of us always nipping at the heels of the other. After about two years of heavy play it became the center of bragging rights amongst the three of us. My brother was constantly surprising my father and I with large scores yet the competition really heated up with myself and my father. Dad who probably wasted several of his college years playing the game would consistently lead the pack.

Ladder is similar to Donkey Kong. Your character is represented as a “P” and you have to complete the level in a certain amount of time, the whole way you must avoid the barrels that are represented by the letter “O”. There are three ways to earn points. The first is by completing the level fast, which in turn adds the unused seconds of the clock onto your score. The second is by jumping over the barrels. The third is by collecting the pots of gold represented by a “&” There are a total of about 7 levels. After beating them all you start back at the beginning but three things have now changed. The time on the clock is a lot less, the barrels have increased in speed and so has your character.

In the spring of 91’ my father attained the unreachable. Jaye and I came to visit him in his office and he greeted us.

“Boys, the Kaypro is set up if you want to play Ladder”.

This exclamation resulted in a minor stampede towards the Kaypro. My brother being smaller was able to squeeze in between my hold of the desk and the chair. We were still jockeying for position when Jaye suddenly exclaimed “Jared look!” I followed the direction of his extended finger, my eyes focused on the screen and my jaw dropped.

“25,895 points!” I yelped.

We turned and found my father with an obvious smirk, poorly controlling a silent chuckle. 25,895 points was about 5,000 over what had been the current high score. Those 5,000 points were the numerical equivalent of a digital Everest looming off in the distance. I had to face facts. The score was so high that I may never again hold the top score.

Keeping up a bold front I stated “I can beat that.”

“Oh yeah?” My father asked as his eye brow rose in disbelief.

“Yup.” I answered.

Confident and assured in his own score my Father suddenly said.

“I am so sure that you can not beat my high score that I will give you $60 dollars if you do.”

Now let me make this clear. My family was poor. We had a house, a car, and food on the table but our budget was very tight. For Dad to offer $60 dollars was his way of completing his victory. Other things make this type of statement. In chess for example it is the laying down of the king. In World War II it was the second atomic bomb dropped on the Japanese. Indeed, many things make this statement. But in the saga of our ongoing game of Ladder, that statement folks, had just been made.

*    *    *

Realizing that like the old west I was being “Called out”, my brother Jaye slowly rose from the computer chair and backed away from the Kaypro computer. My fingers twitching I took his seat and faced the glowing green screen. Taking a deep breath I looked over my shoulder at Jaye.

He came up behind me and whispered “Come on Jared.”

I turned and pressed the enter key and threw myself in to the game. I jumped and dodged my way through the first 12 levels never coming close to dieing. The whole time my brother acted out with finite detail all my amazing on screen moves. If I jumped, he physically jumped behind me. If I climbed a ladder he was right behind me, miming out the scaling of that very ladder. We were a gaming force the likes of which the world had never seen. With the growing of my extra lives, so too did my confidence. I risked a glance over at my father and I thought I saw something, anxiety?

By this time I was up to level 25 which was entitled “Ghost Town”. There are two ways to get through this level. One way was a quite a bit longer. But being as it had large gaps in between jumps it was also considered the “safe bet”. The “hard way” was faster but you had to make about 4 consecutive jumps. Mess up on any one of those and you were falling into a pit of spikes.

Now I had faced off with “Ghost Town” a couple of times prior as I cycled through the levels. But this was different. My “P” character was now quite a bit faster. The barrels were also gaining speed and coming in larger groups. Every time prior I had taken that “safe bet”. My motto was “slow and steady wins the race”. Now though, when I would attempt to go with the “safe bet”, the clock would run down and my character would perish just as I was about to reach the end. Even worse was that every time I took the “hard way” the spikes were always waiting. My father’s smile slowly grew as my lives quickly dwindled.

Before I knew it, I was on my last guy. With Jaye in position my character started forward. My 1st jump came, followed quickly my 2nd and 3rd. The 4th jump loomed ahead and I quickly gave a precisely timed “tap” on the spacebar. Suddenly I was flying through the air, the green spikes rushing beneath my loyal “P”. But as my character came down Jaye and I fell with it, realizing that it would not make the jump. It fell towards oblivion and I turned and faced my father. Dad’s laugh and smirk were utterly supreme and filled the room. My score of 21,544 was far too little to even cause him an ounce of worry.

Seeing that I was pretty shook up from the ordeal and with his ego at an all time high Dad stated.

“Heck, I’ll give you two more chances.”

Now I was still defeated, and my father saw this. What he didn’t see however, was the smallest spark of hope as it lit my eyes.

*    *    *

I jumped and dodged, and Jaye dodged and jumped.

“Noooooooooo” we both screamed as my final life was sent down toward the infamous Ghost Town Spikes.

“Yessss” my Dad answered. “Victory is mine!”

“That’s the second time boys, you have a final try but we all know that it is not going to change anything!”

Again I was defeated and frustrated so I quickly got up and left the room. I sat outside my Dad’s office wracking my brain, hopelessly trying to find a way toward victory. Jaye came out and consoled me and we both sat and grew a strategy. Settling on what our next move would be I went back inside and opened the door to my Dad’s office.

“Could you please bring the Kaypro home this week so I can practice?”  I asked.

“Sure son.” He answered. His teeth shinning as he forced a laugh back down into a smile.

*    *    *

I awoke with a start, trying to sift through the fog of sleep. Narrowing down the unwanted thoughts and focusing in on the answer I knew was there some where.

“I got it!” I thought.

Leaping out of my bed, I headed towards the living room. I found that the Kaypro was gone along with my Dad’s car. My brother followed rubbing the sand from his eyes. I picked up the phone and called my father.

“Dad, I think I am ready to give it a final try.” I said.

My brother’s eyes widened to enormous proportions, suddenly large with the realization that I was risking it all.

“Are you sure you want to do this son?” My Dad asked “This is your last time you know.”

“I’m sure” I said

“You guys can come after school on Monday.” And he hung up the phone

Jaye exclaimed “Jared you haven’t even gotten close to his score when you practice!”

“I know.” I answered “But I have a plan.”

*    *    *

Monday rolled in and Jaye and I showed up at Dad’s office. He watched us out the corner of his eye. The Kaypro was booted up and ready to go. I sat down and then Jaye pulled up a chair and sat down next to me. This caught my father’s eye for a moment. He was expecting the same type of game play, where I would play and Jaye would re-enact. It was obvious that this was not the case. Jaye and I were no longer rowdy.  No longer did we leave wasted energy in our wake. We were now completely and utterly focused. My father thought about this for an instant, then turned and went back to his work.

Cool as ice I pressed the enter key and started a new game. I began it like I always did cruising through the first 12 levels. Levels 18 and 19 gave me some trouble and as I growled under my breath Jaye put a reassuring hand on my shoulder. I gave it my all and made it to level 24 entitled “Long Island” only one level away from the accursed Ghost Town. Now my dad was paying a little bit more attention. I was cruising through level “Long Island” when suddenly, and to my Dad’s great amusement, I died on a very easy section.

“Heh!” He chuckled

I gritted my teeth, let out a sigh, and started the level over. Making it easily through most of the level I again died on an easy section. My Father laughed out loud unable to believe my bad luck. Once more I started the level over and once again I died on what should have been easily avoided.

“Come on Jared you’re giving up” My Dad said heading back to his desk.

Then Jaye did something that sounds still today. It was not loud, though it filled the room. It was not fierce, yet it was our battle cry. The sound contained the simple fact that we had just knocked over my Father’s King.

Jaye simply giggled.

That very sound caught my Dad’s ear and forced him to come back and watch my actions thoroughly. I was starting the level as always, jumping over the barrels and various pits. I easily worked my way to the end of the level. But as I got to the end, I turned around and started back down jumping over barrels the whole time gaining points every step of the way. My Dad’s eyes drifted to my score. To my Father’s shock he suddenly realized, though I was losing the singular battles I was winning this proverbial war.

The strategy to pick a level that had a clock with a large amount of time was the key. I then jumped over the barrels incurring massive amounts of points. The clock would expire and I would die and start the process over.

“I can’t believe this.” My father said looking on in stunned disbelief as he lowered his head into his palms.

I laughed excitedly now and Jaye was dancing, intoxicated with our inevitable victory.

Over the next 15 minutes I proceeded to forfeit every one of my extra lives on level 24 “Long Island”. When it was over my score was walloping 28,560. I didn’t just catch my Dad’s score I was making a statement. You see, other things make this type of statement. In chess for example it is the laying down of the king. In World War II it was the second atomic bomb dropped on the Japanese. Indeed, many things make this statement. But in the saga of our ongoing game of Ladder, that statement folks, had just been made.

Copyright © Jared Folkins
Programming, Computers, Writing, Economics, and Life

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