Makin' Money

No cash? Forgot the credit card? Pay with your phone

Chris Farrell Jan 4, 2011

“Can you please hold on while I pay for my burger and fries?” Pretty soon many of us could be paying the bill at restaurants and retailers with our phones rather than a debit or credit card.

Of course, futurists have been saying this for years while progress has been slow (at least in the U.S.) But it’s intriguing that Wells Fargo is making another bet that the future will arrive soon. Two-hundred employees of its employees in San Francisco will make their payments with phones.

Research firms, including Aite, say that 2012 will be the year when these payments start to ramp up, because phones with NFC will become widely available and more retailers will be giving customers the option to pay with them. Mobile-handset manufacturers and service providers are moving in a direction that would let consumers make payments with their devices.

Mobile phone behemoths like Verizon and giant payment processors like Visa are working at creating a critical mass in the mobile payment business. Considering how consumers are embracing smart phones the bet will probably pay off this time.

It’s always worth paying attention when the Wizard of Omaha acts. Warren Buffett’s Berkshire Hathaway retired a bunch of floating rate debt and substituted it with fixed rate debt. It’s a signal that the word’s greatest stockpicker sees higher interest rates ahead as the U.S. shows increasing signs of gaining traction. Interest rates typically rise when the economy improves.

Berkshire Hathaway is a company. But a household is just like a firm in many respects. Do you have floating rate debt? Is it time to turn it into a fixed rate obligation (or, better yet, get rid of it)?

Wealthy Manhattanites are moving into luxury rentals as prices come down and the cost of owning goes up.

“We want it to be just like owning, but you don’t have the liability and the headache,” said Neumann, the 31-year-old founder of an office-leasing company, who estimates the monthly cost of his rental is slightly more than buying a unit half its size. “I would rather keep the cash and keep my options open than spend it all on property when I’m not clear where the market is going.”

Okay, these folks live in rarified air. Nevertheless, the story is worth highlighting because it emphasizes an often underappreciated aspect of the housing market: The rental and ownership markets compete for the household shelter dollar. In Manhattan it looks like the numbers favor renting. But in many other parts of the country the equation has shifted toward owning.

Take this back-of-the-envelope calculation by Richard Green, director of the Lusk Center for Real Estate at the University of Southern California. (Check out his insightful blog.) He notes the median U.S. house price is $170,500. The most recent American Housing Survey data (2008) put the median rent at $808 a month and the CPI-Rent index has been essentially flat since then. The cash-flow cost of renting is $9,696 per year.

On the homeownership side, Green assumes an interest rate on a 30-year fixed-rate mortgage is 4.5 percent and that the buyer makes a 20 percent down payment. He assumes the buyer could have made 10 percent on the downpayment if it was invested elsewhere, the so-called opportunity cost of capital. Property taxes are 1 percent of house value, marginal income tax rates (state and local) are 25 percent, maintenance costs are 1 percent per year, and amortized closing costs are another 1 percent per year.

Taken altogether, the cash cost of owning is $12,162 per year. Looks like renting still beats owning, right?

Not really. The typical apartment is smaller than the typical house, 1,300 square feet for the median rental unit vs. 1,800 square feet for the median home. Thus, owning the median home is about 10 percent less per square foot than renting the median rental unit. “You need no home price appreciation to still be ahead financially with owning,” he says. “Your after-tax, out-of-pocket cost of owning is less than the out-of-pocket cost of renting.”

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