Warren Buffett On Opportunity Cost

Its no breaking news that you can learn a lot about investment and prosperity from a guy like Warren Bufett. I saw a blurb recently about the Berkshire Hathaway annual shareholder's meeting, and clicked my way into this 5 page document he wrote in 1996 titled "An Owner's Manual", where he outlines his basic economic principles of business operation. There is some great insight here, particularly on the last page where he describes the difference between intrinsic value vs. book value.

This passage uses a well-constructed example of the opportunity costs of college education to illustrate the difference between "Book Value" and "Intrinsic Value", two important business valuation metrics. This same exact principle applies to debt and wealth management when we talk about the use of the marginal dollar.

Most people can clearly evaluate the cost of not paying off a dollar's worth of mortgage principle - we call it interest. But we see most people mistakenly value the actual cost of paying the mortgage principle back, measured in foregone return on investment and foregone liquidity, as well as increased risk and tax exposure.

Its tough to set your financial priorities in order when you don't know what they all cost. With the mortgage being the largest 'bank account' most people have, it is critical that the mortgage plan is congruent with these priorities - adequately valued. Take a look at this for evidence of how 'most people' are missing opportunities to build a better bottom line. Good mortgage planning can take this concept even farther in the right direction.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

Measuring Affordability In Real Estate

There was an interesting article today in Realty Times discussing the currently escalating energy costs, and the implications for home sizes and housing decisions. One might think that with gas prices rising so quickly, the average consumer might alter their behavior reflecting sensitivity to these costs.

The author makes the case that it would take a true energy crisis to change the current course of larger average home sizes (20% are 4 or more bedrooms, nationwide!). One interesting detail is the fact that garage doors are being built with larger dimensions to accommodate the larger, gas-guzzling SUV cars that so many Americans love to drive.

I don't think the average home builder can respond to the weekly changes in gas prices, and expect to see some of the energy-conscious construction trends become more wide-spread. There has been a lot of buzz for months about "green construction" in my area (San Francisco Bay Area), but the building industry has to deliver based on some amount of lag time.

A little over a year ago, the Brookings Institute issued an insightful report about "The Housing Affordability Index, A New Tool for Measuring the True Affordability of a Housing Choice". One of the key issues that hit home for me was the discussion on a consumers tendency to mis-appropriate values of things like commuting, environment, time, road-rage, etc.

We have seen a huge growth of housing in the areas to the East of the Bay Area over the last several years. As a result, tons of homes have been built in towns like Tracy, Stockton and Modesto. There have also been entire up-start communities built at former cattle ranches like Mountain House. Most of this growth has been by people who work in the Bay Area, but cannot afford - or do not want to pay for - the houses. If you doubt this, try driving east on Interstate 580 during afternoon commute hours.

Reading the Brookings paper, you might gain a sense of how to evaluate things like:

• -gas costs, auto wear and tear costs
• -time spent commuting measured against time spent with spouse, kids, etc.
• -psychological costs of road-rage
• -physical health costs of traffic stress, sitting in smog and exhaust fumes
• -health care costs related to the above
• -living away from urban cultural centers, food choices, arts, etc.

Everyone will have a different set of priorities of course. But you need to know how to measure the cost of missed opportunity, and other things that cannot be easily defined in dollar amounts.

If you need help figuring out how your mortgage plan can be molded to accommodate your life's priorities rather than restrict you from them, its time to talk.

John C. Glynn, CMPS

Real Estate Finance & Mortgage Planning

San Francisco

More Movement For Change To Real Estate Commission Model

The Federal Trade Commission has issued a lengthy report getting behind the movement for change to the way Real Estate commissions are structured for residential US Real Estate transactions.

I wrote about this in a previous post with a similar report from the AEI-Brookings Joint Center for Regulatory Studies. I'm a huge fan of the Freakanomics guys; they have some interesting criticism of the Realtor commission model despite a few oversights and a petty undertone. Also, 60 Minutes has a story coming up this Sunday about alternative compensation models. Its unclear if they will contribute to this debate with balanced representation, but the fact is that this issue continues to be one of the biggest in the Real Estate business today.

It continues to be a very interesting battle, and the National Association of Realtors (NAR) has their defenses of course. Problem is, most of it sounds 'defensive'. There is some merit to the claims made by NAR, but the inherent problems with professionalism and integrity within this business make these defenses 'not applicable in all cases'. Some good insight to their viewpoints can be found here (see links at bottom of that page for more).

At the bottom line is a comment I give frequently: work with a professional. It holds true in Real Estate and financial services as much as it does in medicine or auto repairs.