A New Study Challenges the Idea that Home Ownership is the Best Way to Build Wealth

Owning a home might help you save money, but it won’t help you make money. Households are better off taking control of their finances than relying on fluctuating home values. That is the finding of a new study conducted by Florida Atlantic University, Florida International University and the University of Wyoming. “On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds,” wrote study co-author Ken Johnson of FAU’s College of Business, in a release.

The question of rent versus buy has been wildly popular during the housing recovery. The historic housing crash at the end of the last decade came as a bitter shock to millions of Americans, many of whom never considered that home values could fall at all or that they could fall as far as they did. The U.S. homeownership rate is still hovering near its record low, yet buyer demand has been steadily rising. Construction, however, has not been rising quickly enough to meet that demand, resulting in fast-rising prices. In the last few years, prices have increased faster than income and inflation. In some markets, home values have hit record highs, again fueling the debate over which is more lucrative, buying or renting?

Rents have also increased dramatically as new households are formed and millennials, now the largest generation, struggle to afford a down payment. While there has been a building boom in luxury rental housing, that has not been the case with affordable rental development. Still, researchers in the study claim the adage of “throwing your money away on rent” does not hold up. That is because it assumes that the extra money a renter saves by not owning a home and not saving for a down payment is simply spent on goods or services and not invested. “When you assume that those monies are reinvested at a rate of return, renting, on average, wins in terms of wealth creation,” Johnson said. “Of course, many renters will not reinvest those monies and will instead use them for consumer goods, which is the least desirable option in terms of building wealth.” In other words, the rent argument works only if the renter invests the rental savings instead of consuming the money.

Johnson and his colleagues also assessed price volatility. Some local housing markets, like Miami and New York City, are far more volatile than Kansas City or even Atlanta. The researchers therefore went city by city, measuring home price appreciation against a portfolio of stocks and bonds that were equal in volatility. “To have a fair race, that reinvestment into stocks and bonds has to be as risky as that particular housing market,” Johnson said.

While all housing has always been local, home price performance has been especially so following the recession. In the nation’s 24 largest metropolitan housing markets, just four showed median home price appreciation between 2010 and 2016 that was higher than the median return of a stock portfolio, according to a report by Redfin, done in November 2016. Three of those four were in Northern California, and the fourth was Miami. All four rank high among real estate investors, especially foreign investors, not owner occupants.

Nationally, since the recession, there have been two distinct housing markets. “The first is the one that gets all the attention, where high prices, low inventory and strong buyer demand is supported by dirt cheap rates and high job creation and income growth,” said Nela Richardson, Redfin’s chief economist. “The second market is in parts of the country where home prices never took off, unemployment is still high and wages are stagnating,” Richardson said. “Prices aren’t growing quickly in these places and there’s been little home equity growth. The housing market mirrors the growing economic inequality in the country at large: Rich metros grow, poor ones don’t.” When you consider that many Americans are not invested in the stock market, “the forced savings of a monthly mortgage is a key reason why housing has served as an engine of growth for the middle class over the last 50 years,” Richardson added.

As long as home values don’t fall, which has historically been the case in most markets, with the glaring exception of the last recession, homeowners are building a nest egg. They had also been getting a tax advantage. That is now at risk in the Republican tax plan, which curbs the mortgage deduction and in the Senate version, wipes out the property tax deduction. Real estate can still be a good investment, according to Johnson, but not necessarily living in the home you own. Being a landlord or investing in real estate-related stocks and commodities can be more lucrative that keeping all your capital in the nest.


  1. http://cnb.cx/2yOOnSW – CNBC
  2. http://bit.ly/2ANuT1n – TheConversation.com

Game Developers Explore “Free to Play” to Boost Revenues

Free, it turns out, can be a great business. When Shigenori Suzuki played video games in high school, he spent a few hundred dollars a year on titles like Final Fantasy. Now the 42-year-old Tokyoite plays free games including Sony Corp.’s Fate/Grand Order — but spends more overall: He forks over thousands of dollars a year for in-game extras like rare characters and special outfits. Players like Suzuki have transformed the video game industry in recent years, giving companies from Sony to Electronic Arts Inc. new ways to profit without charging upfront. Companies give away games, then sell digital goods and services through so-called microtransactions. After smartphone game developers demonstrated the technique’s profitability, publishers are applying similar approaches to console and PC titles like FIFA and Grand Theft Auto.

Developers earn billions more than the old-fashioned approach of selling a one-time, $60 CD-in-a-box. Game stocks have rallied $110 billion this year, as investors eye the prospect of higher and recurring profits. Add in gains from China’s Tencent Holdings Ltd., whose main business is games with microtransactions, and the figure climbs to about $370 billion. “The model allows players to spend as much as they want and keep spending as long as they like,” says Michael Pachter, an analyst with Wedbush Securities Inc.

Not everyone is celebrating. Gamers have begun to gripe about the constant pressure to pay more. Electronic Arts (E.A.) is coming under fire for its Star Wars: Battlefront II, which debuts Friday and gives substantial advantage to players who pay to improve powers like Darth Vader’s choke hold. There are fears the industry is repeating mistakes of the past, when companies like Zynga Inc. lost millions of users by putting profit first.

“That is a danger,” says Owen Mahoney, chief executive officer of Nexon Co., which pioneered microtransactions in South Korea two decades ago. “The growth rate is unsustainable. Why? Because at the same time you’re monetizing, you’re driving users away and then you have to monetize the remaining ones even harder.” The backlash intensified this week with Battlefront II, EA’s flagship for the holiday season. Despite receiving some acclaim, fans rated it 0.9 out of 10 on the site Metacritic, largely due to what are seen as unfair payment practices. EA is not alone. In October, Microsoft Corp. was forced to change in-game rewards after fans complained they were being shortchanged in racing game Forza Motorsport 7, while Time Warner Inc.’s Shadow of War drew scorn for making it too difficult to see the game’s true ending without paying.

Mahoney and Nexon have an unusual perspective on the controversy. The publisher stumbled on the business model in 1998, when it decided to give away one of its failing puzzle games. “Then someone said, ‘Let’s sell some hairstyles or some cool shoes as a way to make the game a little better.’ And that started to do really well,” says Mahoney, who joined Nexon in 2010 after a decade at EA. The company applied the model more broadly, including to the online role-playing game MapleStory, a free title that’s been profitable for 14 straight years. That kind of longevity is lucrative. Nexon just forecast operating profit will double this year and its shares have almost doubled this year, giving it a market value of about $13 billion. Asian rivals like Tencent began adopting the approach in the 2000s. In the West, Zynga popularized the technique in Facebook games like FarmVille, while Candy Crush-maker King Digital Entertainment Plc brought it to smartphones. In free-to-play games, 2 percent of players typically generate around 50 percent of revenue, according to consultancy Yokozuna Data. High-rollers often spend at least $500 per month.

With such a huge disparity, Mahoney says the secret to keeping everyone happy comes down to balancing three things: keeping it affordable, fair, and tuned to the culture of each country. That means in-game items must be within reach of students and businessmen. It also means purchased items cannot be so advantageous that paying customers always win. “Pay-to-win” strategies infuriate gamers. “If you get that wrong, they all leave at the same time,” says Mahoney. That’s what happened at Zynga. The company “did every horrible thing in the book,” founder Mark Pincus conceded in one speech. About 200 million players fled the platform in 2013 alone, crippling the company. In Japan, Gree Inc. and DeNA Co. faced similar troubles.

In the aftermath, the industry began expanding microtransactions to console and PC games. EA overhauled its popular FIFA soccer game, allowing users to buy items instead of earning them through matches. More recently, PC gaming sensation Playerunknown’s Battlegrounds encourages players to buy in-game outfits, which can go for hundreds of dollars on the secondary market. Today, the industry generates $100 billion in revenue with about 70% coming from in-game goods and services, according to Goldman Sachs Group Inc. Some question whether that balance is sustainable. “The more that games get into nickel-and-diming their players at every turn, the higher the chance of player burnout,” said Jeff Gerstmann, editor-in-chief of gaming publication Giant Bomb. “It cheapens the entire experience.” Despite the controversy, Mahoney is optimistic about free-to-play in the long run. The model means anyone can try a game, raising standards for developers. “You have to be focused on quality,” says Mahoney. “People are starting to finally realize the importance of longevity and bringing your customer back over time.”


  1. https://bloom.bg/2hFf7ln – Bloomberg
  2. http://bit.ly/2zHrwfE – Geek.com

The Good News Is . . .

Good News

  • A monthly reading of home builder sentiment rose two points in November to 70, according to the National Association of Home Builders. This comes after rising four points in October. Anything above fifty is considered positive sentiment. November’s reading is the highest since March of this year and the second highest on record since before the recession. The index stood at 63 in November 2016. Demand for housing is increasing at a consistent pace, driven by job and economic growth, rising homeownership rates and limited housing inventory according to National Association of Home Builders Chief Economist Robert Dietz.
  • Home Depot, Inc., the world’s largest home improvement retailer, reported earnings of $1.84 per share, an increase of 15.0% over year-earlier earnings of $1.60 per share. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $25.0 billion, an increase of 8.1%. Management attributed the results to continued strong growth in comparable store sales and a positive sales impact from hurricanes and other natural disasters.
  • Shanghai Pharmaceuticals has agreed to buy Cardinal Health’s China drug distribution business for $557 million. The acquisition will greatly expand its presence nationwide. The deal will also help Shanghai Pharma, China’s third-largest drug distributor, become a leading importer of foreign medicine into the world’s second-largest drug market. Cardinal Health put its China business up for sale in July amid worries that the country’s upcoming drug distribution reform could slow its growth. Beijing introduced a so-called “two-invoice” procurement system in January on a trial basis as part of an overhaul of the country’s fragmented healthcare sector aimed at streamlining the distribution chain. Under the new system, expected to be fully implemented in 2018, drug manufacturers can only work with a single distributor that directly supplies products to healthcare facilities such as hospitals. Cardinal’s China business is currently the 8th largest drug distributor in the country.


  1. http://bit.ly/2ipv9Nj – Natl. Assoc. of Home Builders
  2. http://cnb.cx/2lwnm3s – CNBC
  3. https://thd.co/2hwp7K7 – Home Depot, Inc.
  4. http://reut.rs/2zKMHgu – Reuters

Planning Tips

Guide to Property Taxes and How They Are Calculated

Every year, millions of homeowners pay property taxes. In most situations, when the tax bill comes, if it seems reasonable, they pay it and move on with their lives. Property taxes can be very confusing for many homeowners. To ensure that you are paying the right amount in property tax, you must understand how the property is valued and how the taxes are calculated. Below is a short guide to help you better understand the calculation of property values. Be sure to consult with your financial advisor if you have any questions about how your property is valued for tax purposes.

Mill Levy or Millage Tax – Property taxes are calculated through the use of the mill levy and the assessed property value. The mill levy is simply the tax rate levied on your property value, with one mill representing one-tenth of one cent. So, for $1,000 of assessed property value, one mill would be equal to $1. Tax levies for each tax jurisdiction in an area are calculated separately, and then all the levies are added together to determine the total mill rate for an entire region. Generally, the city, county and school district each have the power to levy against the properties in their boundaries. So each entity would calculate its required mill levy, and it would all be tallied up to equal the total mill levy. As an example of a mill levy calculation, suppose the total assessed property value in a county is $100 million, and the county decides it needs $1 million in tax revenues to run the county. The mill levy would simply be $1 million divided by $100 million, which equals 1%. Now, suppose the city and school district calculated a mill levy of 0.5% and 3% respectively. The total mill levy for the region would be 4.5% (1%+0.5%+3%), or 45 mills.

Assessed Value of Property – Property taxes are calculated by taking the mill levy, like we determined in the previous example, and multiplying it by the assessed value of your property. The assessed value is a yearly estimation performed to decide the reasonable market value for your home based upon prevailing local real estate market conditions. The assessor will review all relevant information surrounding your property to make an estimate of the overall value. To provide you with the most accurate assessment, the assessor must look at what similar properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, if any improvements were completed, the amount of income you are making from the property, and the amount of interest charged to purchase or construct a property comparable to yours. After the assessor has this information, there are three ways that your property will be valued:

• Performing a sales evaluation
• Cost method
• Income method

Performing a Sales Evaluation – The assessor will value your property based on similar sales that have taken place in the area. As this method is being used, it is important to look at overpricing, underpricing, the location of the property and the overall state of the property.

The Cost Method – This is when the assessor determines your property value based on how much it would cost to replace your property. If the property is not new, assessors determine the amount of depreciation that has taken place and how much the property would be worth if it was empty.

The Income Method – This method is based on how much income you would make from the property if it were rented. Using this method, the assessor must be sure to consider factors such as costs for maintaining the property, cost to manage the property, insurance, taxes and the return that you could reasonably anticipate from the property. After determining market value for the property, the assessed value will be determined by taking the actual value of the property and multiplying it by an assessment rate. The assessment rate is a uniform percentage and varies by tax jurisdiction, and could be any percentage below 100%. After getting the assessed value, it is multiplied by the mill levy to determine your taxes due.For example, suppose the assessor determines your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% we calculated previously, the tax due would be $1,800 ($40,000 x 4.5%).


  1. http://bit.ly/2zKs8kd – Realtor.com
  2. http://bit.ly/2mAQYxQ – TheBalance.com
  3. http://bit.ly/2j0ab7g – Investopedia
  4. http://bit.ly/2mwtCJX – HowStuffWorks.com
  5. http://bit.ly/2yPlV2Z – WikiHow.com