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How I think about debt

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Re: How I think about debt

#131

Post by aworks »

anon7725 wrote: post #110
recursivedoubts wrote: post #70

Earlier quoted context omitted.

debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense debt for productive activity in general makes sense if it isn't compounding (mortgages act like simple interest, btw, although it's compl…

> debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense Has there been a 20 year stretch of time in the US in which housing is broadly a depreciating asset? Seems that land is definitely, and…

I'm not answering your direct question but for reasons, I'm interested in Indiana farm land in the 1920s and 1930s. From a peak in 1920, price per acre was down 2/3rds and didn't fully recover until 1948.

The Great Depression started early for farmers...

https://ag.purdue.edu/commercialag/home/resource/2023/08/the...

Re: How I think about debt

#132

Post by giaour »

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.

The returns might look better if you factor in imputed rent (assuming this is your primary residence). There are definitely investments with higher growth, but the (untaxed!) imputed rent is solid income over the lifetime of the house.

Re: How I think about debt

#133

Post by bluGill »

leononame wrote: post #12
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 think the article still holds up. A financial crisis where you lose your job, a war causing deflation, a housing bubble bursting are all events that could lead to you paying _much_ more than rent. If you can't pay, they'll take your house and everything else until they decide that the debt is paid. In case of a bubble bursting this can mean that you _still_ owe money after they took your house. This has happened to…

If there is a war you leave your house behind. If you rent you can save the difference in a foreign savings account.

the point is there is alway risk and many different situations. depending on details there are different results.

Re: How I think about debt

#134

Post by ihumanable »

psychlops wrote: post #117
Night_Thastus wrote: post #115

Earlier quoted context omitted.

For low-income people, debt is slavery. For high-income people, debt is a powerful tool. The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.

> For high-income people, debt is a powerful tool. How?

Not the original poster, but debt can allow you to shift transactions to periods that are most advantageous to you.

Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock.

If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period.

It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt.

Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate.

So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k.

In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill.

This is how people with assets can use debt as a tool.

Re: How I think about debt

#135

Post by pmg101 »

psunavy03 wrote: post #47
deadbabe wrote: post #20

Earlier quoted context omitted.

Are you going to live in that house for 30 years? What’s your plan when you need to move?

The purpose of a 30-year fixed mortgage is to build up equity in a home you otherwise couldn't afford. If OP moves, they now only have to take on a smaller mortgage for their new home and then keep paying that new mortgage off. The goal is that by the time you reach retirement age, you have paid off the mortgage and own your home free and clear. Thus, you only have to pay the property taxes and have more financial se…

Isn't the common use case that the equity in your home can be exchanged for elder care in your latter years?

Re: How I think about debt

#136

Post by bluGill »

intuitionist wrote: post #103
voisin wrote: post #67

Earlier quoted context omitted.

> A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house. This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to d…

I mean, manufacturing 30-year fixed rate fully pre-payable non-recourse mortgages does not happen in a free market. It takes a lot of government subsidies to make that happen—in particular the government assumes the credit risk on something like 85% of US mortgages. The United States government is very into the idea of spending its resources to subsidize homeownership. Canada has made different policy decisions, like…

It can happen. There is risk, but the reward is very high and so it is worth it.

However the government often will not allow you to get the full reward and so while the numbers work out for everhone in a free market it doesn't happen. adjustable rate mortgages in the us are lower interest rate. Often in the us they are a better deal - we are just looking at one case where everyone in a fixed rate two years ago is better off than those with adjustable rates.

Re: How I think about debt

#137

Post by venv »

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/

Piketty's book (Capital in the Twenty-First Century) is most definitely not a fad. It is a result of serious research into historical economic data and anyone intellectually honest ought take it seriously. As anything in the social science of economics, it is subject to debate, but to call it a 'fad' is odd, to put it mildly.

Re: How I think about debt

#138

Post by kgwgk »

avgDev wrote: post #74
gbalduzzi wrote: post #62

Earlier quoted context omitted.

Sure, and what happens when, after you do that, some calamity happens and stocks go down by more than 50%, you lose your job and you can't pay the mortgage anymore? That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events. As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from a…

You can easily plan for such events. What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%. Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe t…

> What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%.

Quite a lot of people have experienced a market dropping 50% - not so many have seen their house collapse due to some event not covered by their insurance.

Re: How I think about debt

#139

Post by cess11 »

Joel_Mckay wrote: post #73
cess11 wrote: post #64

Earlier quoted context omitted.

Might want to read this monograph from 1990: https://www.cambridge.org/core/books/governing-the-commons/A...

Another counterargument: is the opportunity for individuals to improve family living standards increasing or decreasing since the 1950's? I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life. In my opinion, creating financial securities out of communities just…

You haven't changed my mind, I still think you ought to read Ostrom.

"Mankind does not strive for happiness; only the Englishman does". (Friedrich Nietzsche)

Re: How I think about debt

#140

Post by WalterBright »

Nevermark wrote: post #121
WalterBright wrote: post #109

Earlier quoted context omitted.

> 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.

> That isn't true.

People find out it is true when they try to sell something.

> If you wouldn't sell your house for $1M, then it is worth $1M to you

If you're willing to pay $1M for it, then it's worth that to you.

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