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How I think about debt

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Re: How I think about debt

#121

Post by Nevermark »

WalterBright wrote: post #109
Tade0 wrote: post #83

Earlier quoted context omitted.

> If your house loses half its value, that represents hundreds of thousands in losses. I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house. Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?

> it's still the same house What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.

That isn't true.

The marketplace valuation is just where individual suppliers' and demanders' valuations cross.

The individual valuations are the foundational reality, or the market wouldn't work.

Every time you buy, sell, or decline to sell or buy something, you are operating based on your own valuation. So there is nothing theoretical about it.

Re: How I think about debt

#122

Post by tombert »

oooyay wrote: post #114
tombert wrote: post #6

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…

> I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control" This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subj…

Fair enough, there’s a maximum that they are allowed to raise property taxes in NYC (6% in a year, 20% over five years); my rates will eventually go up, but not super fast.

Re: How I think about debt

#123

Post by morgante »

AndrewKemendo wrote: post #23

This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership How does he reconcile the fact that the companies he lauds in the beginning, would completely shun any business with him (an investor) for precisely the reasons described? I feel like investors and VC are unaware of their own values

What exactly is "equity-debt?" That is never a term I have heard of before.

Re: How I think about debt

#124

Post by tombert »

GenerocUsername wrote: post #92
phaedrus wrote: post #90

Earlier quoted context omitted.

Besides taxes, there is another sense in which outside circumstances can break your "rent control" model of home ownership with 30 year mortgage. Here in Oklahoma, insurance rates have skyrocketed in the last couple years. I now pay more in homeowner's insurance monthly than either my principle or interest payment (though perhaps not both together - yet). And I have a 4.something% mortgage. I suspect it has or will s…

You don't HAVE to carry home insurance do you? You can also change policies for different levels of insurance at any time. It's not exactly a debt, but an ongoing service

I am pretty sure that at least in NY you are required to have insurance if you have a mortgage.

I guess once the mortgage is paid off for whatever reason you’re welcome to not get insurance.

Re: How I think about debt

#125

Post by Kirby64 »

WalterBright wrote: post #108
francisofascii wrote: post #26

Earlier quoted context omitted.

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfort…

Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all. Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make sense.

Re: How I think about debt

#126

Post by Kirby64 »

phaedrus wrote: post #90
tombert wrote: post #6

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…

Besides taxes, there is another sense in which outside circumstances can break your "rent control" model of home ownership with 30 year mortgage. Here in Oklahoma, insurance rates have skyrocketed in the last couple years. I now pay more in homeowner's insurance monthly than either my principle or interest payment (though perhaps not both together - yet). And I have a 4.something% mortgage. I suspect it has or will s…

Assuming it's market condition based and not specific to your house, rents would easily pass along insurance rate hikes to you as well. I don't see much difference in insulation from that for renting vs. buying.

Re: How I think about debt

#127

Post by imtringued »

lurking15 wrote: post #57
Brajeshwar wrote: post #13

Today, I started picking up what I started some time back -- the book “Debt: The First 5,000 Years” by David Graeber goes deep into the details of Debt. I've heard good reviews and I hope this is a good book as they say. https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

I feel like Graeber's book is another (left leaning) fad to glom on to, like Piketty's book some years back. I found this book, The Price of Time by Edward Chancellor [1], very useful for understanding the development of money and debt over history. It's so detailed and clearly extensively researched. [1]: https://www.harvard.com/book/the_price_of_time/

In a general equilibrium economy with no innovation or all innovation potential being exhausted, money demand and interest disappear. "Interest" isn't the price of time, it is the price of liquidity.

For some reason economists seem to gloss over that money doesn't abstract over just time. It abstracts over everything including location, trade partner, the specific commodity being traded and minimum quantities.

Since people involuntarily produce liquidity by bringing their goods to the market, people owning the rights to that liquidity (aka capitalists) can "reap where they haven't sown".

This leads to a paradoxical situation. Liquidity production is work like any other. In short, liquidity production demands to be compensated. Since the holders of liquidity can utilize the benefits of the liquidity services without paying they can either decide to use the liquidity benefits themselves or they can decide to monetize them by selling liquidity on the capital markets. The compensation for this liquidity service is known as risk free interest.

As I mentioned, liquidity demands to be compensated, but since the producer of liquidity does not get paid, they will eventually wisen up and cease producing liquidity in the national transaction network. This leads to production capacity in the economy being dismantled since it represents a commitment in time-commodity-quantity-person-space. Instead, future producers of liquidity await the holders of liquidity to effectively signal their demand so that they know to what production process they should commit to.

Since information acquisition is costly, it is perceived to be cheaper to avoid committing oneself or in more direct terms: interest measures the reluctance to lose control over ones capital.

Re: How I think about debt

#128

Post by mempko »

Here is a mind bending concept. Those that hold a lot of cash are resilient. But that cash came from someone else getting into debt. That's because money IS debt. Money gets created when people take out loans. That debt ends up as income to someone else.

If you hold a lot of savings, others had to get into debt to create the money that ended up in your bank account.

If EVERYONE decides to hoard cash, then the economy goes into a deflationary spiral and everyone's ability to save goes to zero. This is called the Paradox of Thrift.

Many folks on HN have huge savings accounts. Thank those that went into debt so you can have savings. They sacrificed their resilience for you to have yours.

Re: How I think about debt

#129

Post by oooyay »

tombert wrote: post #122
oooyay wrote: post #114

Earlier quoted context omitted.

> I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control" This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subj…

Fair enough, there’s a maximum that they are allowed to raise property taxes in NYC (6% in a year, 20% over five years); my rates will eventually go up, but not super fast.

Yeap! We're subject to a similar maximum in Portland. It was one of the aspects of government I specifically shopped for before we relocated. I did wish I'd looked more into the ever-expanding income tax we have at the city, county, and state levels but that's a different cost structure that's only significantly worse when factoring in Trump era tax reform.

Re: How I think about debt

#130

Post by sokoloff »

incomingpain wrote: post #94
sokoloff wrote: post #79

Earlier quoted context omitted.

> Norway is 210% debt to income. > Canada is 178% debt to income. > The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock…

>The total interest due on the debt is the flow that you should be comparing to the total income flow. That's what these numbers are. I'm talking about a calculated popular metric many people use for many countries all over the world. It's really not a controversial or debated subject for either of these countries.

You’re incorrect about what that figure is.

https://tradingeconomics.com/norway/households-debt-to-incom...

That means for every 100 units of annual income, Norwegians owe 210 units in total debt. (Not total debt service payments [a flow, with unit of kr/yr], but total debt [a stock, with unit of kr].)

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