Category Archives: Uncategorized

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?

 

Technical Report: Part 1-Corporate Statement of Qualifications

Each team will complete a Corporate Statement of Qualifications that includes the following two subsections:

A. Company Profile.
In this section, you will begin working on creating your company identity. Specifically, you need to:
a. Choose a name for your group
b. Create a group identity (including any logos, acronyms and written descriptions of services your company specializes in)
c. Create a vision, a mission, and a statement of your company values. Use examples from engineering and technology companies like Bechtel , Netflix , Amazon , or others you admire.
B. Personnel.
The goal of this second subsection is for your team to describe the qualifications of the individuals that make up your company. Use the information gathered from your LinkedIn and DISC assignments to describe the strengths of your team. List projects – either work, class, or hobby – that group members have completed.
You may find examples of Corporate Statements of Qualifications online here and here
(or elsewhere online).
Your assignment will be graded on the following criteria:
1. Professional presentation of the overall document
2. Well-developed corporate professional Identity
3. Well-developed individual team members’ professional identity

Introduction to the Tragedy of the Commons

All professionals enjoy a privileged position in society.  For example, licensing laws prohibit entry into professions such as medicine, law, or professional engineering.  As a consequence, the people who DO have a license to practice can charge higher rates.  Additionally, professionals often enjoy public subsidies — either reducing the cost of education or underwriting institutions that enable the practice (such as public hospitals, courts,  research grants, or public works).

In return for this privileged standing, society places expectations on professionals.  Most notably, professionals are expected to hold the social good above their own.

Individually, all professionals have an incentive to cheat society by cutting corners to reduce their own costs, abuse the power that expertise offers, or otherwise unfairly place their own interest ahead of others.  For example, some doctors that own stock in pharmaceutical companies have been charged with preferentially (or unnecessarily) prescribing drugs produced by the companies they own, thereby increasing their own profits at the expense of patients and insurance companies.

However, in these cases it is clear that the abuses perpetrated by the individual will tarnish the reputation of the entire profession, placing the privilege enjoyed by the profession at risk.  Thus, all profession have internal regulatory bodies that sanction those deviants that fail to ascribe to a code of conduct that protects both the public and the profession (as a whole).

The interaction between the individual professional and the  group can be modeled as a problem in non-cooperative game theory.  In this class of problems, individuals can unilaterally (i.e., without making agreements with others) advance their own position, but only at the expense of other individuals in the group.  Alternatively, if all people in the group agree to cooperate, the entire group can be better off.

Without some sort of individual restraint of ambition or avarice, a group confronted with a non-cooperative game theoretic problem will either degenerate into a tragic catastrophe, or result in the savvy players making suckers out of the naive. The first six minutes of the Dark Knight movie (starring Heath Ledger as the Joker) illustrates this point.  Notice how the Joker uses greed to turn the individual members of his gang against one another.

In fact, the entire plot of the Dark Knight movie revolves around the Joker setting up one non-cooperative game theoretic problem after another, just to see what might be revealed about the character of his victims.

The classic example of a non-cooperative game theoretic problem is The Prisoner’s Dilemma.  In this video clip, Salman Khan explains the problem that two prisoners face when they are being interrogated separately by the police, and why the police are likely to get confessions.

A special type of game-theoretic problem involves managing common pool resources.  In this case, every individual has an incentive to take more from the common resource, but if all individuals take too much, the resource will be ruined and everyone will suffer.  This special case is called The Tragedy of the Commons.

Khan explains the problem in terms of public fisheries, but in Khan’s explanation, the individuals also have private ponds in which they can keep their own fish.  In this case, private ownership changes the incentive structure such that owners will more carefully manage the resources and maintain the longevity of the fishery — which is also in the public interest.

However, privatization of some common pool resources, such as the atmosphere, is highly problematic. Elinor Ostrom points out that cooperation between individuals can exist despite the incentive to cheat and in the absence of a third party (meaning someone outside the group) enforcement.  In these instances, groups typically institute their own mechanisms of enforcement.

Because some common pool resources (such as the atmosphere) are not amenable to privatization, Ostrom’s discovery of alternative mechanisms may be especially important to sustainability.  However, recognition of game-theoretic problems significantly complicates moral analysis.  Because the outcomes of an interesting game-theoretic problem depend on interaction between two or more players, where should the moral culpability for the tragedy reside?

In fact, doing the “right thing” in a non-cooperative game theoretic problem might actually encourage other players to do the wrong thing, by improving their payoffs.  The converse is also true.  Doing the wrong thing (that is, defecting or failing to cooperate), or at least the credible threat of the wrong thing, might actually turn out to be the only way to ensure that other players do the right thing, as this video from a popular British game show illustrates.

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.