Is Home Ownership Overrated?


smhomebuyersFor generations of Americans, It’s a Wonderful Life pretty much sums up the benefits of home ownership. George Bailey takes over his father’s savings and loan in Bedford Falls, builds Bailey Park, an idyllic affordable-housing development, and issues mortgages. In the alternative universe where George never lived, there’s no savings and loan or Bailey Park; the townspeople have fallen into debauchery as tenants of the usurious Henry Potter; and quaint Bedford Falls, now renamed Pottersville, is home to sleazy nightclubs and pawnshops.

Director Frank Capra’s vision has dominated public policy ever since. Republicans and Democrats have competed to extol home ownership as a sound investment and source of moral virtue, stability and community.

Growing up in the small-town Midwest of the 1950s and ’60s, I never questioned those precepts. In my family, mortgage payments were a sacred obligation. The idea of “throwing away money on rent,” not to mention being beholden to the whims of a landlord, seemed anathema. The few neighborhoods where people rented were indeed shabby. After I moved to New York City, it took a decade of savings, but as soon as I had a down payment, I bought an apartment.

In the wake of the real estate bubble and collapse, all of these assumptions have been called into question—and in some cases, are under attack. Decades of policies designed to foster home ownership are being reexamined, from taxpayer support for the giant mortgage agencies to the tax deduction for mortgage interest. In light of this sea change, I decided to reapproach the sacred cow of home ownership with an open mind. Does it make sense financially? Does it promote social benefits?

In some cities, the past decade has been brutal for homeowners. In Atlanta average home prices this year are the same as they were in 2000—11 years ago—according to the Case-Shiller home-price index. Nationally, the rate of appreciation in housing seems likely to return to its long-term historical average, which is only slightly higher than the rate of inflation. Purely as an investment, residential real estate is never going to outperform the stock market or many other asset classes.

Nonetheless, home ownership has historically yielded other financial benefits. “Over 75 years the mortgage system is how the middle and lower-middle class accumulated capital,” John Quigley, a professor of economics at the University of California at Berkeley, told me. “It was a system of forced savings rather than an investment per se. It was never intended to triple your money in three years.”

For the most part, the system worked as intended, enabling Americans to accumulate wealth, put their children though college and retire comfortably. Returns were enhanced by the leverage provided by the mortgage—as long as housing prices rose. But as with any asset, leverage can also magnify losses. No one can borrow 80 percent of the price of a stock, yet that amount of leverage—and even more—became routine with real estate. In the wake of the housing collapse, that notion is being reexamined. “People have not ascribed enough of a risk premium to the leverage,” says Christopher Mayer, professor of real estate at Columbia Business School.

Today, the answer to the question of whether a home is a good investment may well be “not always,” according to Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. Policies that increased home ownership created what Gabriel calls “transitory owners,” who ended up suffering defaults, evictions, foreclosures and other financial disruptions. “Policy that creates only temporary home ownership is bad policy,” Gabriel adds.

If the financial benefits of home ownership seem elusive in some circumstances, the social benefits are even more so. When it comes to promoting stability and other social benefits, nearly every economist I interviewed agreed that it’s difficult if not impossible to separate home ownership from other variables that correlate with desirable environments, like affluence and levels of education.

The home ownership rate in France is 57 percent; in Germany, 46 percent; and in Switzerland, just 37 percent. By comparison, it’s 67 percent in the U.S. Housing is only one variable, of course, but no one would argue that communities in France or Germany are less stable, less cohesive or more unkempt than those in the U.S. Zurich and other cities in pristine Switzerland are a far cry from Pottersville.

Once you question the notion that everyone should own a home, the policy implications are significant. As Mayer says, “Too much of current policy seems aimed at promoting consumption of housing—ever larger and more lavish homes—rather than ownership itself.” All the economists I interviewed criticized the mortgage deduction as needlessly benefiting affluent taxpayers (most low-income taxpayers don’t itemize, so they get no benefit). Most agreed it should be phased out, perhaps over 15 to 20 years to minimize the effect on housing prices.

But they also agreed that there’s a place for some government support for home ownership, primarily as a way to promote savings. Warren Buffett, who has lived for more than 50 years in a home that cost him $31,500, made a resonant comment on this issue in his latest letter to shareholders of Berkshire Hathaway: “Our country’s social goal should not be to put families into the house of their dreams, but rather, to put them into a house they can afford.”

Source: Smart Money
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Why The NFL Needs To Rethink Its Innovation Game


It’s safe to say that few organizations are as successful as the National Football League. Its games draw more fans on average than any other professional sports league in the world. Its teams earn billions of dollars in revenue from television and radio broadcast rights. Twelve of the top 25 most viewed television programs in U.S. history were Super Bowls; more than 100 million (or one out of three Americans) watched Super Bowl XLIV on Feb. 7, 2010.

Still, the 2010 season brought a dark reminder that not every part of the NFL’s business model is functioning smoothly. In 2009, the NFL blacked out 22 games, a 144% rise from 2008. In 2010, 26 blackouts occurred. NFL attendance peaked back in 2007, when more than 17 million tickets were sold. Since then, attendance has dropped each year, down 2.4% in 2009 to 16.7 million tickets sold. In 2010 paid attendance was flat from 2009, but season ticket sales fell 5%.

The reasons are nothing if not obvious–the economy’s health, poor team performance, competition from HDTV. And if the causes are obvious, the responses have been nothing if not predictable: Focusing on their most profitable customers, teams are trying to beat HDTV at its own game by offering the TV experience at the stadium to its season ticket holders.

What is not so obvious is why this approach is inevitably doomed to fail and the opportunities the NFL is overlooking as a result. The league’s problem getting fans off the couch and into the stadium is a classic case of what Harvard Business School professor Clayton Christensen calls “disruptive innovation.”

That’s a process set in motion when someone invents an alternative to an established product or service that, in some respects, is not really as good, but is nevertheless in some way vastly easier, cheaper or more convenient. Because it’s not as good, it tends to draw off the least loyal customer at first, and so established, incumbent players tend to ignore it, as they continue to focus on their best and most profitable customers. But inevitably, the not-quite-good-enough offering becomes better and better, drawing off more and more customers. Typically, by the time the defenders recognize the threat, they are losing customers quickly.

In this case, NFL teams are the defending incumbents and the at-home, HDTV experience is the disruptor. Watching football on television is clearly far more convenient and infinitely less expensive than going to the game. Ten years ago, it was also vastly inferior to seeing the game live. But HDTV now creates a great home-viewing experience, and it’s no wonder that more and more fans would rather enjoy that experience than spend roughly $100 a person to sit high up in the stands, watching tiny players from a single vantage point, with no commentary, waiting through dead moments, sometimes in bad weather in an often family-unfriendly environment.

To be fair, football is not really a cut-and-dried case of disruptive innovation, since the savvy NFL has shared in–and profited mightily from–the revenues generated by the televised broadcasts. Still, it is not so savvy as to avoid the most common mistake incumbents make when confronted with disruption. When it comes to its efforts to fill those empty seats, the NFL is falling into all the classic traps–focusing on its most profitable customers and competing head-to-head with the disruptor on its own terms.

Just who are these consumer groups? Let’s take a look:

The Super Fan
The NFL’s most profitable customer is the season ticket holder, the guy–and it is almost always a guy–who loves the emotional high of “being there” and invests heavily in team gear, fantasy football and specialized TV channel subscriptions. Teams, in turn, invest heavily in keeping this fan happy and for good reason: He represents an up-front, long-term revenue commitment.

Like many organizations in many industries, however, teams are taking the wrong approach to understanding this customer. By installing multimillion-dollar screens (some carrying the same specialized TV channels) and handheld devices, they are trying to replicate the at-home experience in the stadium. Christensen, of Harvard, has piles of stats that show that when an incumbent tries to play the game in the same way as a disruptor, it’s rarely the incumbent who comes out on top. These fans are not coming to the stadium to get a better home experience. They’re coming to find something they can’t get at home–unique value that helps them achieve their deeper life motivations.

The Casual Fan
But let’s leave the super fan in his seat for a moment because that guy is still coming to the stadium. To fill those emptying seats, the NFL has to move beyond the question of what would make people who already love them love them more and focus on why casual fans and nonfans are increasingly reluctant to come out to the games. The Oakland Raiders, home to five of the 16 blackouts this season, have an estimated base of some 24,000 season ticket holders but a stadium that holds more than 60,000. Each Sunday, then, the Raiders need to attract not only the 24,000 super fans, but also more than 36,000 casual fans to fill the Oakland Alameda County Coliseum and prevent a blackout. Bigger stadiums and better technology won’t overcome the growing barriers that matter to these casual fan–the cost, the traffic, the lack of restrooms and rowdy fans.

To find out what will, NFL teams have to take a broader view of those people’s lives and consider what problems and needs they might have (or, as Professor Christensen thinks of it, “what jobs these people have to do”) that could be fulfilled by going to see a football game. With this so-called jobs-to-be-done approach, NFL teams can not only stem the stadium exodus, but win the hearts and wallets of super fans, casual fans and nonfans alike.

A Winning Strategy
Rather than segment individuals according to gender, age, income or other traditional demographic category, a jobs-based approach, logically enough, groups people according to the jobs they need to do. For example:

–“Convince my family to attend a game.”

–“Engage my spouse in the game.”

–“Feel like I am helping the team win.”

–“Feel like I have access that others do not.”

–“Demonstrate that I am a super fan.”

–“Keep others from knowing that I am just a casual fan.”

When looked at in this light, it’s easier to see that lots of different people have lots of different jobs they need to do (and, in fact, the same person might have more than one job). Consider, for instance, the spouse who wants to share the super fan’s interests but doesn’t know enough about the finer points of game or its players to follow along or become enthusiastic. Or the family decision-maker (perhaps the same person as the spouse in a different circumstance) who’s seeking to “spend time with family,” but concerned about spending too much money and worried about bringing kids to a probably-not-family-friendly stadium environment. Or the super fan, who wants to feel as connected as possible to the team and show others the strength of his/her passion. Or the part-time fan, who only attends a few games a year, but wants to feel like a super fan and convey to others a higher-than-actual level of commitment to the team.

Grouping individuals by the jobs they need done immediately suggests actions NFL teams could take to fulfill those jobs, suggesting ways to attract people’s business that grouping them merely by age, gender or the like could never do. Some ideas for these segments include:

*Creating more family-friendly experiences through family-only seating, parking and concessions areas.

*Developing special online publications featuring novice-level explanations of routes and strategies and stories about players’ personal interests and hobbies or workout routines.

*Establishing a service that would give fans a personalized recap of game action.

*Offering interactive phone applications and games through which fans can attain increasing levels of social networking status by demonstrating their knowledge and commitment to the team.

*Creating an immersive, seat-shaking, “In the Action” section in the stadium to make fans feel like part of the team.

The Two-Minute Warning
Even the most successful enterprises must continue to innovate, identify ways to improve customer engagement and grow revenue. The “at-home experience” will keep on improving: 3-D video, immersive audio, multiple data streams and expanded interactivity will make the couch increasingly competitive with a hard, cold stadium seat. This is true not only for the NFL but for basketball, Nascar and other sports franchises.

Particularly in a time when owners and players are looking for ways to generate new sources of revenue, NFL teams should follow the approach that has created significant value in many other industries. Get to the root of customers’ problems, think more broadly about what motivates not only their most, but their least, loyal customers, develop innovative solutions to solve the fundamental problems within those segments, and grow the revenue opportunity for all involved.

By: Alex Slawsby and Ned Calder (Forbes)

China: Facebook’s undiscovered country


If Mark Zuckerberg wants in on the biggest boom country in Asia, the social networking champ will have to make some tough choices about what kind of company he wants Facebook to be.

“Like” it, hate it, or just plain don’t care, there’s no denying the Facebook effect. In six years, the social networking site has usurped both Friendster and MySpace and amassed nearly 600 million registered users who access it in more than 200 countries across six continents, from Tunisia to Qatar.

But there’s one huge country where the site has failed to make headway — China. Where America represented the land of opportunity to immigrants during the first half of the 20th century, China now represents the country with the most untapped potential for Mark Zuckerberg and Facebook. Facebook used to have a presence there, but for the better part of two years, the site has been mostly inaccessible, thanks to government censorship. And given Facebook’s incredible penetration statistics in the U.S., China’s 420 million Internet users represent a pretty large pool for a company still in an aggressive growth stage to have to pass up.

That’s probably why the idea of a Chinese Facebook presence is so tantalizing for Zuckerberg, who visited the country last December. Though vacationing with his girlfriend, the CEO also found time to meet with tech companies, including Robin Li, CEO of Chinese search engine giant Baidu.

“Obviously this is one of the big dark spots for Facebook because it is blocked here,” Baidu spokesman Kaiser Kuo said recently. “I’m sure [Zuckerberg] wants to get the advice of someone who knows the Internet landscape well here.”

Zuckerberg himself has all-but-admitted his own interest.

“Our theory is that if we can show that we as a Western company can succeed in a place where no other country has, then we can start to figure out the right partnerships we would need to succeed in China on our terms,” Zuckerberg said during a speech at Stanford University last year. “How can you connect the whole world if you leave out 1.6 billion people?”

The Great Firewall

When it comes to Internet access, Chinese citizens don’t have a whole lot of say in the matter. Facebook remains off-limits to them, though that wasn’t always the case. The social network launched a remotely hosted, Chinese language version in June 2008, but extremely slow access plagued the service until 2009.

Then in July of that year, riots erupted in Urumqi, the capital of China’s Xinjiang region. Some 1,400 protesters were arrested, and among the media, the situation was dubbed “the next Tiananmen.” Soon after, Chinese Facebook users who tried to log in ran up against a “Network Timeout” error message. The government had been officially blocked the social network, pushing it beyond “The Great Firewall of China” to, according to Li Zhi, the Communist Party of China’s Urumqi police chief, “quench the riots quickly and prevent violence from spreading to other places.”

Facebook has remained blocked ever since, forcing some loyal users to get creative. Search the Internet long enough, and you’ll find underground forums populated by disgruntled Chinese users discussing ways to get around the firewall, including web-based proxies like SecuriTales, a plug-in-free, installation-free paid service, or a Virtual Private Network (VPN) like GoTrusted, that accesses the Internet through an Internet Service Provider (ISP) in another country.

“When Facebook was blocked, everyone was devastated,” an American expatriate in China who runs his own business told Fortune. A regular Facebook user since 2008, he now uses a VPN to access the social network. He views censorship as a necessary evil.

“Before the [Shanghai] World Expo started, they shut down a whole server farm for three days without warning so police could go through and look at each and every server and see if there was content they didn’t like,” he said, one of many such anecdotes emanating from the country that gives credence to the government’s commitment to censorship.

As free speech advocates argue, the government shouldn’t wield such power. But to succeed over there, a foreign product like Facebook would have to tolerate it. If Facebook grows large enough, it will, like Google (GOOG), have to face down a set of tough choices about how much it is willing to let the Chinese government peer into its server farms, in exchange for the ability to do business in the country.

Facebook’s gameplan

So far, Facebook has managed to stay mum on a market entry strategy.

“We are interested in China and are just starting to study and learn about the country, as part of evaluating various possible approaches to China that would most benefit our users, developers and advertisers,” Debbie Frost, Facebook’s Director of Global Communications, told Fortune.

The challenges for when Facebook does enter though are formidable. At the very least, it must confront the following issues:

Work locally. First and foremost, Facebook should be prepared to work with the Chinese government at an unprecedented level. If it wants to bypass the “Great Firewall,” which affects all sites outside the country, it needs to be hosted locally. To do that, Facebook will need a business license, a difficult thing to get unless it partners with a local company. It’s possible Facebook could position acquiring this license as a partnership, possibly by pairing up with a large, established Chinese player like Baidu. Doing so, whether it’s a serious joint venture or just a formality, will help Facebook cut through many layers of red tape and bureaucracy and expedite the process.

Censor. China is renowned for its strict supervision of Internet content. Currently, YouTube, Human Rights Watch, Voice of America, and a number of other sites remain inaccessible, and sites that are locally hosted find themselves policed by the government on a day-to-day basis. Chinese Internet companies like Baidu get by because they cooperate, deleting content in response to phone calls and instant messages from authorities requesting that they do, with far less protection of speech than U.S. law provides to Internet companies and users.

The issue most recently came to a head last year, when Google made history and withdrew from China, sacrificing billions of dollars in future revenues in the process, all based on co-founder Sergey Brin’s business and personal principles. (As Fortune reported, Brin was uncomfortable doing business with a stifling regime that resembled his native Soviet Union.)

If Facebook wants to run on local servers, it must be prepared to censor, though even then, it runs into the problem of just how it should censor content, and how far it should go. Should users be banned from “Friend”-ing others who “Like” taboo pages about say, Tibet or Tiananmen Square? Will status updates with verboten keywords, subjects, or links from banned sites be automatically deleted from News Feeds? Facebook must figure out how to address those issues and more. It’s arguable that censoring an interconnected social network will be far more challenging than simply deleting certain search results or links to website. Censorship on a Facebook page would likely look much more obvious, unless Facebook made a big committment to developing a version of its service that could mask that censorship from its users. And that’s probably a a must, because if Facebook doesn’t censor to the government’s satisfaction, it would probably be right back on the outside of China looking in before long.

Create a new Facebook? The social network could go down a different route entirely, creating a China-exclusive section or network that adheres to government regulations but operates separately from Facebook proper. Such a Facebook Great Firewall might be a somewhat easier undertaking. By balkanizing Chinese users and putting them in a sort of bubble, it’ll be much easier to control what content they can and can’t see, rather than trying to figure out a way for them to interact with international members.

Challenge local competition. Ever heard of Orkut? Launched in 2004 by Google, the social network ultimately failed to gain traction in markets like the U.S., but became a surprising hit in Brazil, so much so that the company’s offices are headquartered there now. According to Forrester analyst Nate Elliot, Orkut’s success was largely due to the fact that there wasn’t much in the way of local competition.

China is a different story. There are several locally-established players already, including popular Facebook copycats Renren and Kaixin001. Facebook may be champ in the U.S. and in other countries, but in China, it would need to start from scratch. Social networks at their core are about the people — after all, who really populates the News Feed with status updates, videos, photos, and links?

Local partnerships could benefit Facebook in terms of wider visibility and drawing potential users. Of course, the whole exercise could be irrelevant. China has made an economy out of copying and customizing the world’s ideas for its own customers and exportation– from handbags to cars to Japanese bullet trains, it’s simply part of the way the country does business and those local players aren’t waiting around for Facebook to get its operating license. That’s why one Chinese Internet company is already promising to learn from and adapt Facebook — ie, copy it — for Chinese users.

In the end, Facebook will have to ask itself, given all the financial, moral, and political sacrifices, if it’s willing to go this far for new users. It will have to ask if the very idea of a social network is undermined if the content on it is limited not by users’ imaginations or interests, but government interference. For the world, the question then becomes whether the Chinese Facebook will resemble the experience current users take for granted, or whether it will be an unrecognizable product that goes too far towards appeasement to be legitimate.

If it’s the latter, new users in China — and politically minded users worldwide — could find themselves pushing the “dislike” button on Facebook — by not logging on at all — pretty quickly.

By: JP Mangalindan (Fortune)

We Need More Rich People


Let’s raise a glass of champagne — or bottled water — and toast to Wealth in the New Year!

Let’s root for the rich — and for having more of them. Let’s hope for more Google or Groupon-type billionaires. They are living proof that America is still the land of opportunity.

It’s not so fashionable to be wealthy in an economy beset with unemployment, falling home prices, and recession. For the past few years, it’s been popular to shop at Marshalls — home of discount pricing on designer duds — and avoid Neiman Marcus (except for the sales, of course). It’s less chic to drive a Maybach than a Fisker Karma.

Dozens of billionaires have signed a pledge to give at least half their wealth away on death. (That would still leave plenty for the next generations, but who’s counting except Bill Gates’ dad?) Still, there’s outrage that the wealthy can exempt $5 million of the assets they accumulated from the death tax, which could presumably be used to fund more “worthy” government programs.

Discreet restraint is in style, whether in clothing, autos, jewelry, or estate planning. That’s because everyone’s talking about the wealth gap — the difference between the earnings of the truly rich and those who make do on low-paying jobs or government benefits.

The wealthy aren’t speaking up these days to defend the capitalist system that created their riches. Perhaps that’s partly because of the egregious and inexcusable behavior, now revealed, in the financial services industry, and other corporate fiefdoms.

The most public display of the arrogance of wealth came two years ago as auto industry CEOs flew to Washington in their private jets to plead for government aid. Shame on them, especially since it wasn’t their money that bought and fueled those G-5s. Ever since then, it’s been downhill for public displays of wealth.

Still, the massive rush to punish the wealthy through higher taxation could have a huge negative impact on all of us. That’s because even if we taxed away all their wealth, either through the income tax, the capital gains tax, or the estate tax, it still wouldn’t be enough to fill our annual deficit gap. And it would most likely make the budget hole even deeper.

Who Pays Income Taxes, Anyway?

To understand that reasoning, you have to take an honest look at where all the income tax money is coming from. The following analysis comes from the Tax Foundation, based on the most recent IRS data.

In 2008, the last year for which hard data are available, the top 1% of the nation’s adjusted gross income earners earned 20% of the total national income. Those are the truly wealthy. And they paid 38% of the nation’s taxes.

That year, the top 10% of the nation’s AGI earners earned 45.77% of the income, but they paid in 69.64% of the total taxes paid that year.

In fact, the top 50% of the nation’s AGI earners, earned 87.25% of the total income but they paid in 97.30% of the total income taxes.

As for the bottom 50%, they get a pretty good deal. In fact, many of those who pay no income taxes get refunds from the government. According to the Tax Foundation, more than 23 million returns received refundable credits in excess of the employee’s share of payroll taxes. Not only are they getting money back — but they are effectively not paying for the Social Security and Medicare benefits they will eventually receive.

Redistributing Wealth Destroys Incentives

There comes a point of diminishing returns from higher tax rates, as Dr. Arthur Laffer pointed out 30 years ago. But you don’t have to believe a curve drawn on a napkin — and you don’t need to know exactly where that point — the moment where the most creative and intelligent people decide it’s not worth it to work harder or earn more — comes into play. It’s a subjective, but very real factor.

Bjorn Borg was just a tennis player — but smart enough to know that he’d better get out of Sweden if he wanted to keep and grow his money. Similarly the Beatles dodged the then-confiscatory British tax rates. When wealthy people leave, or stop working, there goes the tax base.

The politics of envy has never achieved economic growth, because it has at its core a desire to redistribute the existing wealth, instead of creating incentives to create growth that can lift an entire society.

Redistributing wealth has never made a country wealthier. In fact, we’ve seen the ultimate and most extreme example of the destructive force of redistribution in the old Soviet Union, which tested that theory to extinction.

Today, we are told that there are too many “rich” people. Instead, we should think that there are not enough rich people.

Because only wealthy people can pay the taxes that will fill in our budget deficits.

Only wealth directed to risk-taking can create the jobs that lift people off of unemployment benefits.

Only the incentive to build more wealth can create the economic growth America needs to pay down its debt and lead to a better future.

So here’s a toast to the rich. May they invest wisely. And may we have many more of them in 2011.

By: Terry Savage (Yahoo Finance)

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