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Sunday, October 19, 2008

Not Quite Freakonomics

Man, I feel like such a geek for putting this on my blog. This isn't even like writing a post about javascript, which I might have some business doing. But hey, it's what I think about, and maybe somebody will pick up the ideas and use them (well, most the second idea... I don't know if the first idea has any practical application, except maybe to dentists to motivate their patients to take care of their teeth).

The Economics of Flossing

I have two baby teeth. Although they're not in bad condition, there's no question they're going to come out sooner or later. I was at the dentist a couple of weeks ago, and we briefly discussed options for replacing them. I'm not planning on doing it until they actually cause problems, but I did ask how much it would be. For an implant, about $5k. Now, insurance will cover some of that, but I don't know how much. For the sake of current argument, let's just pretend I'll have to cover all of it.

Now, let's also assume that each day I floss pushes back by one day when I'll need to get the implant. This is also a bad assumption. As I said, at some point, those teeth will come out, no matter how well I take care of them. It's also likely, I believe, that not flossing at all will cause the replacement to occur in less than half the time of flossing every day. Of course this also depends on a lot of other factors, like how often I brunch, whether I use fluoride mouthwash, how much sugar I eat, etc. Missing one day of flossing probably causes less harm than missing multiple consecutive days. Nevertheless, this assumption probably isn't that far from the truth.

But, using both these crude approximations, let's do a back of the envelope calculation. If I take that $5k and invest it at 5%, that's $250/year, or a bit under $1/day. If flossing takes 2 minutes, that's about $30/hr to floss. Now, that's just for one tooth. I have at least two that are likely to need replacement, so that doubles the value. For the other teeth, who knows - they probably won't fall out as long as I keep up a fairly minimal care routine, but they benefit from that 2 minutes as well. They probably won't need as many fillings over the year, and I've needed a couple of fillings already and had copay for them. All in all, flossing appears to make excellent economic sense, as long as having your teeth is worth the potential cost to fix them.

Creative Financing

I've become a rabid follower of financial news. And I'm well aware that a big chunk of the problems going on now are because too many people were provided with loans there was a good chance they wouldn't be able to afford before long, either due to their own circumstances or because of changes in the loan terms. Anything called "creative financing" probably sounds crazy risky right now. But, bear with me... this is the opposite of the problematic things.

What if we reversed one of the primary the problems with these loans, namely, that the payments went up at some potentially inconvenient point? Take a standard 30 year mortgage. About 16.7% of your initial payment goes to principle, and the rest to interest. The common thing these days is to do interest only for some period, usually 3-10 years, after which you have to start paying off the whole balance on a shorter time scale, and possibly at a higher rate. Sure, your pay might be higher, and there's inflation, but it's still a bit of a risky proposition, and often a prompt to refinance (getting the brokers and originators more fees, of course).

But, you could reverse this: say, for the first 5 years, you pay an additional amount that goes directly to principle, after which, you have a lower balance and your payments go down to amortize over the remaining 25 years. Better (maybe, depending on your perspective), you could make it completely fluid: any extra payment you made went toward principle, and every month, the minimum payment was calculated to amortize the remaining balance over the remaining payment time. That way, you could pay down the balance not just to shorten the life of the loan, but to lower your payments later. The current mortgage system gives people very little incentive to pay off their loans: you only get to deduct the interest, not the principle, so the more paid off you are, the less of a deduction you get. Once you've paid that money in, you can't get it out without originating an equity loan or line of credit, and if the housing market goes down, you may not be able to get anything out at all. Canadian homeowners apparently have over 75% equity in their homes, whereas in the US the figure is below 50% (2nd hand statistic).

Why have I never heard of any programs like this? Did they used to have them, but not now, like assumable mortgages? I doubt it. More, I suspect it's a combination of a few things. First, for a good while until just the past couple months, people spent as much as they could possibly afford on housing, figuring their pay would go up, as would the value of the property, so they didn't want higher payments to start out with. Second, banks and mortgage brokers would rather have people refi to lower their payments so they can get more fees, and tell people they can always pay extra principle if they choose to (which almost nobody does). Greedy buggers.

Greedy, greedy buggers, all of us, me included.

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