Atlas Shrugged: The Mocking

Monday, July 21, 2014

Economic Predictions

Megan McArdle's output has been odd of late; unusually short posts, infrequent posting, and especially very rare early posting leads one to wonder what is going on in the little scamp's life. Her latest post states that we should not blame Obama for DC's gentrification, which is extremely generous of her considering that for years she has been predicting Obama will end the world as we know it.

Usually McArdle comes out with a Happy Job Announcement after such attempts to be fair-n-balanced; she markets herself as above the petty partisan fray and therefore she might be searching for a new position or other money-making opportunity. However she might just be dashing off a few posts between peddling her book in the media, so we will just have to wait and see.

Last week McArdle lovingly described the stacks and piles into which she has placed all her wonderful money while telling her envious audience that she is trying to pay down her mortgage very swiftly. Some people might think it a bit tacky to describe one's wealth in such detail right after informing us that the poor are unfortunate road-kill on her superhighway to prosperity, but McArdle is not one of those people.  One wonders what P. Suderman, boy gamer, thinks of her financial plans; is he thrilled to Silas Marner his pay like McArdle, watching the growing electronic numbers glitter like gold, or is he dreaming of community property laws?

Wait and see, my friends. Wait and see.

THRILLING UPDATE! McArdle did an "international radio interview," according to her twitter.


random_eddie • a day ago

  "We figure it will take us a little less than three years to recoup our refinancing costs, which included points to buy down our rate."  
When I was shopping for a mortgage, I assumed that I'd be paying points to buy down the rates. Low rates are good, right? Especially over the long run, right? It just makes sense, right?  

Wrong. Turns out you can calculate how much of a return you're likely to get on the points you pay, based on how long you think you're going to hold your mortgage (i.e. how long until you pay it off, refinance, or sell). There are calculators on the Internet that will give you either a) the break-even period (this is NOT the same as the three years you mentioned above) or b) the effective rate of return. If the break-even period is longer than you expect to hold the loan, or conversely if the effective rate of return is lower than you expect to earn on your marginal investment, then paying points is a losing proposition.  

I shopped rates. On all quotes from all lenders, the rate of return from paying points was mediocre at best; close enough to the long-run market return that paying points wasn't an obvious slam-dunk win. So instead I kept my cash, figuring that between increased marginal savings and the opportunity cost of liquid funds (especially when buying a house - moving costs, new carpet, fixing the thousand natural shocks that houses are heir to), if the interest rates make it a toss-up situation then cash on hand comes out ahead.

Bullitt315   • a day ago
Congratulations on your introduction to finance 101.  
random_eddie   • 20 hours ago  
It may be simple and basic, but it seems a lot of people - including our hostess - don't know about it.

Bullitt315  • 20 hours ago
She's knows it. People aren't finance 101. The snark was uncalled for but I put more in my mortgage now because I rather not spend too much time on personal finance. Ballpark is usually 3-5 years and I know i'll be in my house for longer than that and I also know I ballpark my savings. I could divert the same extra payment to a savings or investment account but if times get lean, I might have to tap it in a down market. I know I shouldn't eat cheetos so I don't buy them. I don't put them on the counter and say "Bullitt, don't eat!"

random_eddie  • 19 hours ago
  This is the Internet; snark is always called for. :)

Megan is exactly the sort of person who can understand the math AND form a long-term plan AND have the discipline required to stick to it. She's already talked about how she and Peter have been setting aside uncommonly-large portions of their paycheck and putting it into emergency funds, long-term savings, and their mortgage principal. That kind of math+discipline is exactly what's needed to make a 30yr-plus-invest-the-extra pay off vs. a 15yr.  

If you do the math and have the discipline, it adds up to some hundreds of thousands of dollars. Megan is certainly welcome to give up that money if she wishes. But it seems like an odd thing to do, especially since (as she put it) "I don’t know about you, but I could find something to do with an extra $200,000."   
McMegan  • a day ago  
We expect to be in the home 15 years from now, so this is not an issue for us.
random_eddie   • a day ago Even at fifteen years, it may not pay off as much as you think.  

An actual example, using rate quotes I got last week from a major national retail bank:  
15yr fixed, held for 15 years
Zero points: 3.38%
0.75 points: 3.25%
33% marginal tax rate  

Rate of Return Over 15 Year Holding Period:
Pre Tax 5.41%
After Tax 4.51%  

That's a lousy return on your investment. Maybe the specific deal that you got has better numbers, but if you didn't run them through a calculator (specifically, a calculator such as you might find on the internet by searching for "mortgage points return on investment calculator") then you may be surprised at how little your investment in points is actually paying off.

Doesn't he know that her calculators never work?

ADDED: Snicker


fish said...

She starts by saying all financial advisors advise against it and then plows ahead and does it anyway with lots of justifications. One might begin to suspect that she does things impulsively and then retroactively finds reasons for doing so. But Meagan would never do anything like that. Right?

mew said...

Coincidentally, Suderman's Skyrim character is named Silas Marner.

ifthethunderdontgetya™³²®© said...

Washington was an agricultural paradise before 2009.


Susan of Texas said...

I wonder if she is expecting the stock market to fall. She certainly seems to be betting that interest rates will go up, which is no surprise considering who she reads and follows.

Susan of Texas said...

stupid html.

fish said...

Doesn't really matter if stocks crash and interest goes up. It will go up for bonds and CD's too so she could shift from stocks to bonds. Basically only one of her reasons is rational, owning the house outright in 15 years is a hedge against massive income loss risking you losing the house or if you sell it, getting more of the principle as cash out.