What is about the rising house price of your personal residence (where you live) that appeals to us? I have never understood this bias.
Once you are in your house and all settled in, shouldn’t its market value on the upside be irrelevant? Its not like you can sell the house immediately and capture the appreciation. Its not like you can take a home equity loan (in today’s climate) and convert some of that increased equity into real cash. The only person who is gaining an advantage in this rising price environment is the tax collector, since you have to pay more $ in taxes every year on the newly assessed (rising) value.
This seems like a shitty deal! Every year there is increased outflow of cash (taxes) and no inflow, since the appreciation is an unrealized gain.
Continue reading “House prices and behavioral bias”
Myth 1: Interest and taxes are deductible. You are getting paid by the government to own a house
Lets walk through an example. You make $100K a year. Pay $6K in real estate taxes and $10K in mortgage interest. There are two types of deductions available when you file your tax returns, a standard deduction and itemized deduction. For 2011 the standard deduction is $11,900. Assuming you did not buy a house your taxable income = $100K – $11.9K = $88.1K. At a marginal tax rate of 35% you will owe $30.8K in taxes. So effectively you paid $30.8K out of your pocket. Now assume you took the itemized deduction and deducted the entire taxes+interest. So taxable income = $100K-$16K=$84K. At 35% tax rate, tax = $29.4K. So great right, you paid less tax, so less out of pocket?
Continue reading “Buying a house? Don’t fall for the myths”