Apr 09th
Digital Diversion
In the United States alone, annual individual giving to charity exceeds 2 percent of GDP, with approximately 90 percent of people donating a total of more than $300 billion in 2008. While the stakes are clearly quite high, there is still disagreement on the precise factors that motivate some people to give and others to refrain from donating.
In Testing for Altruism and Social Pressure in Charitable Giving (NBER Working Paper No. 15629), authorsStefano DellaVigna, John List, and Ulrike Malmendier describe two types of motivation that may underlie charitable giving. If individuals give because they enjoy giving, for example because they care about a specific worthy cause, or they like the warm glow of giving, then altruism is the motivation. On the other hand, if a person does not want to say “no” to the solicitor and would avoid personal interaction with the solicitor if forewarned, then the motivation is social pressure.
To test for which of these motivations matters most, the authors design a field experiment involving door-to-door fundraising drives for two charities: a local children’s hospital, which has a reputation as a premier hospital for children, and an out-of-state charity, not known by most potential donors. Some of the 7,668 households in the towns surrounding Chicago that were approached in this experiment between April and October, 2008 were given an opportunity to avoid the solicitor. One group of households got a flyer on their doorknob that notified them a day in advance about the exact time of solicitation, so that they could avoid it. A second group also got the flyer, but it included a box that could be checked if the household did “not want to be disturbed.”
The authors find that the flyer reduces the share of households opening the door by 10 to 25 percent. If the flyer allows checking a “Do Not Disturb” box, it reduces giving by 30 percent, mainly among donations smaller than $10. These findings suggest that social pressure is an important determinant of door-to-door giving.
The authors use the data collected in their field experiment to estimate the parameters of a structural model for consumer charitable behavior. This model suggests that the estimated social pressure cost of saying no to a solicitor is $3.50 for an in-state charity and $1.40 for an out-of-state charity.”
Should You Pay Off Your Mortgage or Invest?
Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?
Evaluating the opportunity cost
Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.
Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.
By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.
To determine if you would come out ahead if you invested your extra cash,start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.
For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?
Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.
Other points to consider
While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.
- What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
- Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.
- How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
- Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
- Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.
- How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
- Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.
- Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
- How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).
- Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
- How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.
The middle ground
If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.
And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.
The week ending 9 April was light in terms of market-moving economic data. While the data was mixed, we gained incremental insight into service-based businesses and consumer spending on credit.
| RELEASE (leading, coincident or lagging indicator) | PERIOD | ACTUAL | EXPECTED (consensus) | LAST | HIA COMMENT |
| ISM Services Index (leading) | March | 55.4 | 54.0 | 53.0 | The ISM services index rose for the third month and moved further into expansionary territory. The important new orders component accelerated the most in 5 years. |
| Consumer Credit (lagging) | February | -$11.5 B | -$0.7 B | +$5.0 B | The amount of consumer credit outstanding reversed January’s rise, resuming the decline from previous months. |
ISM SERVICES INDEX
Beating the consensus of analysts’ expectations, the Index rose further above the 50.0 mark, indicating continued expansion of the critical service sector. Fourteen of 16 industries expanded, with highest growth seen in the “agriculture”, “forestry”, and “fishing & hunting” industries; still slowing are “real estate, rental & leasing” and “educational services.” A sharp acceleration of the new orders component, now up for seven consecutive months, is very encouraging. However, the Index’s employment component showed a slower rate of contraction but remains weak.
According to the Cleveland Fed, spending on services, at about 40% of GDP, dwarfs spending on durable and nondurable goods. Growth in this Index suggests that demand may strengthen enough to create the need for job formation. Also, the majority of services are provided domestically, not exported; this reading, then, is a clearer signal of organic US economic growth than the ISM Manufacturing Index.
GRAPH: ISM
CONSUMER CREDIT
Consumer credit outstanding reversed January’s bounce, dropping another -5.6% in February. Non-revolving credit, such as auto loans, fell -1.6% after rising +1.4% and +6.9% the previous two months. Revolving credit like credit cards plummeted again, dropping -13.1%. The declines reflect both consumer pay-downs and tightened credit standards.
The February drop in consumer credit suggests that consumers used the credit that was available to them to purchase items around the end of the year – for the holidays perhaps. They appear to have reduced those balances after that spending spree.
CONSUMER CREDIT, $B (white), 3mo moving avg (red); 3/31/07 – 2/28/10
GRAPH: Bloomberg
The US Bureau of Labor Statistics today released February 2010 Unemployment data for the 372 metropolitan statistical areas (MSAs) it surveys. According to the BLS the non-seasonally adjusted unemployment rate for the Boise-Nampa MSA was 10.7% for the month of February, an increase of +2.3% from February 2009. Over that period, the number of unemployed workers in the Boise area rose by +6500, from 24,500 to 31,000, while the labor force shrank from 293,600 to 290,000. The unemployment rate declined -0.1% from January 2010.
At 10.7% Boise’s seasonally unadjusted unemployment rate was higher than the national (10.6%) and state (10.5%) averages and most other areas surveyed within the state. Boise’s +2.3% year-over-year change in the unemployment rate was also more dramatic than the national average (+1.5%) but slightly lower than the average of the Idaho cities surveyed (+2.4%).
In February 347 of the 372 MSAs had unemployment rates higher than a year earlier, and 217 MSAs had lower unemployment rates than Boise. The MSAs with the lowest unemployment rates nationally were Fargo ND (4.6%) and Lincoln NE (4.9%). Those with the highest rates were El Centro CA (27.2%), Merced CA (22.1%) and Yuba City CA (21.6%).
The largest decrease in the year-over-year rate were seen in Elkhart-Goshen IN (-3.8%), while the largest increase were in Farmington MN (+5.0%), Weirton-Steubenville WV/OH (+4.8%), Decatur IL (+4.5%) and Yuma AZ (+4.5%).
As is widely understood, the downturn in home prices has been the albatross around the economy’s neck for the past couple of years. The New York Federal Reserve Bank recently published research expanding on our understanding of how local markets across the US were affected by the bubble and its collapse.
While it’s difficult to separate causation from correlation, its appears that the prevalence of “subprime” mortgages was a key factor in the expansion and retraction. The table below suggests that areas with a higher usage have seen greater delinquencies and foreclosures.
Apr 02th
Harmonic Notes Newsletter 4-2-10
Harmonic Notes – http://p0.vresp.com/dJJsHU
Apr 02th
“Separating Wheat from Chaff”
As even a casual observer would recognize, there are hundreds of pieces of economic data available from various departments within the Federal government and private research firms. There’s also lots of anecdotal information, too. Unfortunately, as a relatively young (17 month anniversary is tomorrow, 3 April!) investment and research firm we don’t have time or the patience to try to analyze and write about what we find interesting, much less every thing that’s available. It’s clear, though, that some data are more important than others, because:
- they have a higher information content,
- their methodology is more robust,
- they’re more timely,
- they tend to “move the market”,
- or they’re familiar to the public at large.
With the able assistance of intern Vu Ngo, a senior majoring in finance at Boise State University, we’ve “separated the economic wheat from the chaff” by creating a list of about 15 indicators on which our research will focus.
We segmented our list by the component of the economy about which it informs us. The list looks like this:
CONSUMER
- Retail Sales
- Univ of Michigan Consumer Sentiment
- New & Existing Home Sales
- Consumer Credit
- Real Personal Consumption Expenditures (aka consumer spending)
- Unemployment Situation
- Consumer Price Index
- S&P / Case-Shiller Home Price Index
BUSINESS
- ISM Manufacturing Index
- ISM Service Index
- Durable Goods Orders
- Industrial Production & Capacity Utilization
- Productivity and Costs
FOREIGN TRADE
- International Trade
OVERALL MACROECONOMIC ACTIVITY
- GDP
- Chicago Fed National Activity Index
- Economic Cycle Research Institute Weekly Leading Index
Of course we’ll keep our finger on the pulse of other data, and this list may change if items lose their efficacy. We think, however, it strikes a good balance between data overload and having too narrow a focus.
It clearly doesn’t mean the US economy’s out of the woods, but Bloomberg reported recently that the 15 largest states are forecasting a slight gain in their tax revenues for fiscal 2011. New York, New Jersey and even California (!) are seeing higher-than-expected tax collections.
Obviously, this is another sliver of good news suggesting a gradual, albeit uneven and fitful, economic recovery.
The article is available here.
Apr 09th
Independent Market Commentary
Author: Admin
Comments: 0
As an avid golfer and a fan of college basketball, this is my favorite week of the year. The week started with the basketball championship and ends with the Maters. The Dow is flirting with 11000 and retail sales are gangbuster. Too bad my day started with the crazy dog following the dumb dog over the back fence right when I was leaving to take my youngest one to school. At least the markets are rallying this morning. One of the advantages of the combining Kenn’s top down analysis with my bottom analysis is that we are able to compare notes test our hypothesis’.
Yesterday’s retail sales numbers were very strong. This continues a trend that has been emerging in recent months. Additionally, it appears that shoppers have been returning to some of the “high end” retailers. I am sure Kenn and I will be discussing this in the coming days. One thought that occurred to me recently is that the consumer could be reacting this way due to the large improvement in the value of most retirement accounts. Even though people are probably not tapping these accounts to spend, I think it is entirely possible that even just a sigh of relief can change how one behaves. If this is indeed the case it offers both opportunity but also risk if we go through a market correction. It should be a lively discussion. I am off the track down the AWOL dogs. Have a great Masters weekend.