Author Archives: Thomas P Seager

About Thomas P Seager

I teach "Engineering Business Practices" and "Sustainable Engineering Systems" at Arizona State University in Tempe AZ.

Communications in the Digital Age Requires Protocols

In CEE300 we use an explicit protocol that exploits multiple channels for communications, without adding confusion..

When selecting a channel, students and I must know two things:

  1. The privacy of the communication, and
  2. The urgency with which a response or action is requested.

Read more on Medium here:
https://medium.com/productivity-revolution/communications-in-the-digital-age-is-confusing-adf1d6f8542d?source=friends_link&sk=57a8564fac48b15149b3179a4191f07e

Buy vs Rent: Homes

Since so many people lost their homes, their down payments, and all of their home equity in the 2007 mortgage derivatives crisis, many of them have been reluctant to venture back into home ownership.  Real estate prices in many cities have recovered, but buyers have not.  Homeownership rates in the US peaked shortly before the crisis and began a long steady decline from which they have never recovered.

Homeownership Rates

Even as home prices plummeted during the Great Recession of 2007/2008, rents kept climbing.

Although homeownership used to be the cornerstone of the American dream, these changes in housing economics have called into question the conventional wisdom. Now, many people are asking, “Should I buy, or should I rent?

Typical analyses draw attention to the difference is who pays what expenses, such as maintenance, taxes, utilities, mortgage principal, and interest.  What these analyses fail to realize is that these expenses, normally associated with home ownership, must be built into rent as well.  That is landlords expect to be able to pay all of the expenses they are responsible for from the proceeds of the rent they collect.  Aside form the convenience of being able to remodel, redecorate (for home owners) or not having to worry about surprise repair expenses (for renters), the principal financial difference in the decision to rent or buy depends on three things (in declining order):

  1. Changes in the market value of the home,
  2. The creditworthiness of the buyer/renter, as expressed in terms of the interest rate at which they can borrow funds (i.e, obtain a mortgage), and
  3. The frequency of transaction costs, such as real estate commissions.

By far, the most important of these, the most uncertain of these, and the most difficult of these to get good guidance or advice on, is the change in the market value of the home.

To establish the current market value of any particular home, professional appraisers typically look for comparable homes that have sold recently.  Using a database of home sales available from the Multiple Listing Service (MLS), appraisers will establish the value of an uncertain property by comparing it to those of similar size, condition, and locations, making adjustments for inevitable dissimilarities.  Because only licensed professionals have access to the MLS data, buyers, renters, landlords or home owners doing their own research must rely on alternative sites such as zillow.com or realtor.com, which glean sales data from public records and provide updated estimates or home value.  Because these estimates are not informed by an inspection of the property in its current condition, they are often understood to be less reliable than a professional appraisal or a real estate market analysis.  Nonetheless, they are widely available.

Home owners take all of the risk of declining home prices, and all of the gain of increasing.  Moreover, except in the case of adjustable rate mortgages (ARMs), homeowners enjoy certainty in fixed mortgage principal and interest payments.  Only their taxes and maintenance expenses can go up.  By contrast, renters may be subject to price increases when market conditions result in low vacancy rates.

Thus, the decision to Buy vs Rent will depend on the net present value of the expected future cash flow forecasts.  Home owners should forecast constant payments for several years, with only modest increases for taxes or home owners association fees, while renters might use the data in Figure 2 above to forecast slowly increasing rents.  At purchase, a homeowner may incur large one-time transactions fees and pay a down payment, whereas a renter will only be required to post a security deposit (and sometimes the first and last month of rent). At the end of the ownership or rental period, the homeowner will sell the property and have the proceeds of the sales, less any transaction fees (such as a real estate commission, typically 5%-7% of the sale price) and the payment of the remaining mortgage principal.  Thus, the homeowner might recover cash from the sale, or have to pay additional cash if their sale price is insufficient to fund payment of the remaining mortgage principal.  By contrast, the rent typically expects only return of their security deposit, with no market risk from the sale and fewer transactions costs.

The best way to answer the Buy vs Rent question is to draw the expected cash flow diagrams for each alternative, compute the net present value, and then conduct a sensitivity analysis that explores different eventual sale prices.  The alternative with the least net present cost (or value) will be the preferred option… but, the answer is likely to depend entirely on the final sales prices.  Those buyers optimistic about market appreciation will have a preference for buying, while pessimistic buyers will prefer to rent.

 

 

What problem are you trying to solve?

Simon Sinek advises us to Start With Why? when communicating our ideas.

In his hypothetical marketing message from Apple (back when Steve Jobs was CEO) he asks us to imagine what it might sound like if Apple started with What? they do instead of Why? they do it. And it (of course) falls flat.

The Why? of engineering entrepreneurship typically starts with a problem to solve. We can compare Sinek’s hypothetical Apple marketing to the real launch of the original iphone, by Jobs himself.

In this video, Jobs explicitly explains the Why? when he says, “The problem is… “.

Whenever we define a problem, we simultaneously call to mind the solution. Understanding the problem that you’re trying then becomes the most important thing about your solution.

For example, the peer-to-peer ride hailing app Uber as famously founded to solve the problem that passengers have waiting for taxis.  A very similar app called Gett was conceived in the same way, but launched to solve the problem that taxi drivers have finding passengers.  Although the apps provide almost the same solution, they solve different problems.  (By contrast, Lyft was founded to solve the problem of empty seats in cars driven home from college campuses during breaks).

Most engineers only receive training in problem solving, to the neglect of problem formulation. As a consequence, engineers are too often the mere instruments hired to create innovative technologies that conform the world to someone else’s imagination.

There are four questions essential to engineering innovation:

  • WHAT problem are you trying to solve?
  • WHY is this problem important?
  • WHO has the problem? and
  • HOW MUCH are the people with the problem willing to pay for a solution?

 

Stop Doing Homework?

The convention wisdom in Higher Education is that engineering students must do some minimum amount of homework to be successful mastering mathematical problem-solving.  This wisdom mostly feels right to teachers and students — to the point where student expectations of an engineering course often amount to a series of problem sets that constitute an exercise in matching formulas with the right problems and using algebra to solve for the missing variable.

But it’s not exactly clear what the students are actually learning in such course — except perhaps some basic algebra.  It is remarkable how little research there is that supports the idea that homework problem sets improve mathematical learning.

This article tries to shed some scientific light on the question, “Does homework improve performance on exams?”  The answer seems to be “No.”

I’m not arguing that exam performance is the ultimate goal of any learning activity.  But if there is any basis for justifying a traditional homework problem set, wouldn’t it be to better prepare for exams?  For example, I don’t think we could argue that mathematical problem sets improve moral character, or leadership skills, or self-awareness, or interpersonal communication, or creativity, or any of the other things that we might value in engineering professionals.  If they do nothing else, then at least homework problem should improve performance on exams, right?

Our CEE300 class is organized around the premise that the world no longer needs more people who are good at solving mathematical problem sets.  We need people that can identify, formulate, and resolve real problems in the real world.

Homework: An Unnecessary Evil?

Surprising Findings Challenge the Conventional Wisdom (Again)
Published on November 24, 2012 by Alfie Kohn in The Homework Myth

A brand-new study on the academic effects of homework offers not only some intriguing results but also a lesson on how to read a study — and a reminder of the importance of doing just that:  reading studies (carefully) rather than relying on summaries by journalists or even by the researchers themselves.

Let’s start by reviewing what we know from earlier investigations.[1]  First, no research has ever found a benefit to assigning homework (of any kind or in any amount) in elementary school.  In fact, there isn’t even a positive correlation between, on the one hand, having younger children do some homework (vs. none), or more (vs. less), and, on the other hand, any measure of achievement.  If we’re making 12-year-olds, much less five-year-olds, do homework, it’s either because we’re misinformed about what the evidence says or because we think kids ought to have to do homework despite what the evidence says… .

The better the research, the less likely one is to find any benefits from homework.

via Homework: An Unnecessary Evil? | Psychology Today.

 

Seager Responds to Citicorp Case Study

It’s going to take awhile to go thru all of the essays (individual and group on the LeMessurier/ Citicorp case study.  So I recorded my own answer and posted it here.

Don’t think that your views must necessarily conform to mine.  I’m explaining my interpretation so that readers understand how to interpret and apply the Fundamental Canons — not to indict LeMessurier or impose my perspective on a situation that can be viewed from many angles.

UN-learning for Entrepreneurs

An article in Inc.com claims that to become successful entrepreneurs, students need to UNlearn several lessons that schools have made an extraordinary effort to teach them.  I’ll paraphrase here:

  1. Excellence is measured in how well you follow instructions.
  2. Expect micro-management (including milestones, deadlines and constant feedback).
  3. Time off (or “break”) is the highlight of your experience..
  4. Criticism means you’re failing.
  5. Stick to the rules or be rejected.

One of the biggest and most consistent complaints I get in my CEE300Engineering Business Practices is about the lack of structure.  Here’s a sampling of student comments taken directly from my teaching evaluations, in response to the question prompt “What did you like least about this course?”

I felt as though the class was unorganized and kind of haphazard at times.

Lack of structure.

No structure.

That we spend most of the time period without getting any instructions or assignments.

Controversy in class.

Sometimes unclear of what was to be done and when.

Very unorganized and unstructured.

The unstructured nature of the course provided little information on assignment due dates.

Not having a set schedule.

I did not like that the course was unorganized. There were days when I would go into class and have no idea what was going on.

Probably not having an actually schedule and how the syllabus changed every single week!

The fact that there was no consistent schedule that I could plan my weeks around, but that’s life, right?

When I look at the UNlessons in the article and relate them to my course, it looks like this:

  1. Following instructions.  Assignment guides are minimalistic and grading rubrics include a category (typically 10% of the overall grade) that says, “Goes beyond the assignment instructions.  In other words, following the instructions perfectly can only get you to a 90/100 — just enough for an A-.  Students that want an A must do more.
  2. Micromanagement.  There are few deadlines — just some loose guideposts.  In fact, nobody necessarily dies if the students miss a target date.  In most cases, it’s up the students to set their own schedules.
  3. Time off.  We run on a 24/7 cycle.  Class is in session, on-line, all the time.  That includes weekends and what we typically call “breaks”.
  4. Criticism.  It’s when you’re close to being really good that you get the most critique.  My attention is disproportionately allocated to on helping the ‘B+’ students become ‘A’ students.  If students aren’t getting critique, it’s either because they’re already awesome and they’re hearing nothing but praise, or they are so bad it’s not worth my time.
  5. Rules.  Part of the process is allowing the students to make up some of their own rules as they go.  From the comments above, I know that’s frustrating.  Sometimes the students get mad at each other.  Because one of the learning objectives is leadership, it’s important that students have a space in which they can actually emerge as leaders.

Among the negative comments on my teaching evaluations are several from students that suggest they “did not learn anything,” here’s one of my favorites:

Overall a very disorganized, useless class (the way it was taught), and just a waste of time.

The first thing to take from that is pretty positive.  If this student didn’t learn anything in my class, then they are at least saved the trouble of having to UNlearn the class if they ever become an entrepreneur.  The second thing is that entrepreneurship isn’t for everyone.

Although Universities all claim that they are preparing “tomorrow’s leaders,” we know that can’t possibly be true of all their students.  Moreover, not all leaders are entrepreneurs.  Nonetheless, I think the Inc.com article pretty much has it right.  For those students that do have a predilection for entrepreneurship, the usual expectations of the University do little but place obstacles in their path.  I hope Engineering Business Practices is an exception.

Read the full article here: Entrepreneurs: 5 Things to Un-Learn From School | Inc.com.

To Buy or Lease a Car? That is the Question

Suze Orman writes a column for O, The Oprah Magazine on personal finance, so presumably she knows something that Oprah Winfrey‘s readers don’t.  Here’s what she says about the question of whether to buy or lease a car:

The Buy vs Lease Decision

You Auto Think Twice About Leasing a Car

By Suze Orman

It drives me nuts to see all the money wasted on car leases.

In my opinion, leases are a drug for status-conscious people who need the rush of driving a “nicer” car than they can really afford. The auto-financing folks have basically perfected a way to let you think you can have your cake and eat it too. Can’t afford to buy a BMW or Lexus? No problem, just lease it!

Well I am here to tell you it is a very big problem… .

Read more from Yahoo Finance.

By contrast, Mark Solheim at Kiplinger’s finance says that people have preconceived ideas about leasing he calls “myths”:

Five Myths on Leasing a Car

The truth about five common car leasing myths.

By Mark Solheim, Senior Editor

Leasing often gets a bad rap, and no wonder: Its confusing argot sounds like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car buyers who simply wanted low monthly payments.

Read more at Kiplinger’s Finance

Lastly, here’s advice from certified public account (CPA) and video journalist Stacy Johnson that actually attempts some math:

In Johnson’s view, buying is usually less expensive, but he doesn’t go into the details.  He thinks the math is too intimidating for most viewers, and he advising using an on-line calculator (although it’s not clear what you’re supposed to do with the on-line calculator).

In my opinion, Orman, Solheim and Johnson are all full of baloney. Even Khan Academy, which brands itself as the website where you can “Learn almost anything for free” comes up empty on the topic of buying vs. leasing a new car.  

As it turns out, this is one of the most complicated finance problems that most people will confront during their lives, and the vast majority are ill-equipped to understand it (including experienced car dealers).

This series of videos is intended to break down the choice of leasing versus buying a car using the tools of engineering finance.  The first video begins drawing exemplary cash flow diagrams that allow comparison of the options.
This video completes the cash flow diagram for the lease option, and shows the equations necessary to compare the buying vs. leasing options on a net present value basis.
This video explains how a new car lease looks from the perspective of the leasing company and explains the risk that the leasing company accepts regarding the residual value in the lease agreement (or book value) and the market value of the used car at the end of the lease.
The last video compares the cost of buying with leasing a new car.  It concludes that, even in cases where leasing is more expensive, having the option to put the car back on the leasing company at the end of the lease term reduces risk, which may justify the increased expense.
In general, drivers with high discount rates (such as high-rate credit cards) will be better off leasing a vehicle for several years, even if they intend to buy it at the end of the lease term!  This fact is often overlooked by personal finance “experts” that write advice on buying vs. leasing.  This might be because the experts believe it is unlikely that someone with high-rate credit card debt will have the discipline to use the money saved on car payments to pay their debt down.