How I think about debt • Hacker News Board

Re: How I think about debt

#251

Post by wyre » Mon, May 06, 2024, 10:54 PM UTC

rcxdude wrote: post #214

dheera wrote: post #204

Earlier quoted context omitted.

I never understood buying things that I can't afford. I always thought you earn money and when you earn enough money to buy something you can buy that something. That is always how I have lived life. For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don…

It's more typical to think of 'affording' in terms of your expected lifetime income, and this is generally a good predictor of people's spending habits. Lending generally enables this. Avoiding debt entirely is a very risk-averse strategy. As ridiculous as house prices are, they are still generally affordable for many (and whether renting or buying is a better overall financial decision is dependent on many factors w…

>As ridiculous as house prices are, they are still generally affordable for many

What? Technically this is true because “many” people already own homes and can use that wealth towards another. However, when talking about the unafordability of homes the target market being discussed should be first-time home buyers (unless you have an investment podcast or something).

In my HCoL bubble the only people I know that can afford their first house are high-income DINKs, or living 30mins outside of the city, or have a high-paying remote job and can relocate to a LCoL area with its own drawbacks.

Re: How I think about debt

#252

Post by rqtwteye » Mon, May 06, 2024, 10:54 PM UTC

WalterBright wrote: post #183

bluGill wrote: post #142

Earlier quoted context omitted.

if you don't live there long term houses are a bad investment. Live in the same place for 20 years and it becomes much better.

Generally, to break even you've gotta stay at least 5 years. The transaction costs of selling a house are enormous. Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance. I just had to replace the roof on my house. Wow, that was a whopping bill. The roofer told me if I…

"Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance."

If you manage to pick Microsoft in 2014, Apple in 2000, Tesla in 2015 and BTC in 2010, you are definitely way better off not buying a house but keep renting.

Re: How I think about debt

#253

Post by SkyMarshal » Mon, May 06, 2024, 10:57 PM UTC

This is essentially an explanation of "absorbing barriers" [1] from ergodicity economics [2]. In ergodic systems, the ensemble average and time average are equivalent, but in non-ergodic systems (most of real life) they aren't. In non-ergodic systems, E[X] [3] is path-dependent.

An absorbing barrier is like going all-in on a hand in poker and losing - you lose your entire bankroll, are out of the game, you stop progressing and have no more iterations. Your E[X] no longer incorporates the set of all possible steps or outcomes (ensemble average), but only the ones you actually experienced before incurring the absorbing barrier (time/path dependent average). As a result your real-life E[X] materially differs from your theoretical one.

The lesson is that long-term survival should anticipate absorbing barriers, prioritize avoiding them, and build deep buffers against them (cash on hand, etc).

[1]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance)

[2]:https://ergodicityeconomics.com/

[3]:https://en.wikipedia.org/wiki/Expected_value

[4]:https://www.nature.com/articles/s41567-019-0732-0

Re: How I think about debt

#254

Post by rnewme » Mon, May 06, 2024, 11:01 PM UTC

beryilma wrote: post #243

TexanFeller wrote: post #200

I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental heal…

Owning a house does not mean not owing anyone a cent. You still owe multiple types of taxes to the government. You still need to get insurance. You still need to make repairs. I actually find piece of mind in renting. I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.

Selling that house before moving to the country side is surely amount to something

Re: How I think about debt

#255

Post by geraldwhen » Mon, May 06, 2024, 11:02 PM UTC

beryilma wrote: post #243

TexanFeller wrote: post #200

I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental heal…

Owning a house does not mean not owing anyone a cent. You still owe multiple types of taxes to the government. You still need to get insurance. You still need to make repairs. I actually find piece of mind in renting. I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.

You can buy better neighbors with a house, and less crime.

Re: How I think about debt

#256

Post by rcxdude » Mon, May 06, 2024, 11:02 PM UTC

wyre wrote: post #251

rcxdude wrote: post #214

Earlier quoted context omitted.

It's more typical to think of 'affording' in terms of your expected lifetime income, and this is generally a good predictor of people's spending habits. Lending generally enables this. Avoiding debt entirely is a very risk-averse strategy. As ridiculous as house prices are, they are still generally affordable for many (and whether renting or buying is a better overall financial decision is dependent on many factors w…

>As ridiculous as house prices are, they are still generally affordable for many What? Technically this is true because “many” people already own homes and can use that wealth towards another. However, when talking about the unafordability of homes the target market being discussed should be first-time home buyers (unless you have an investment podcast or something). In my HCoL bubble the only people I know that can…

I did mostly mean it in that weasly-way. My main point is that if you can afford the mortgage, you can afford the house, you don't need to be able to make a cash payment for it to afford it. Housing is for sure becoming very difficult to afford even by that definition in a lot of places (and it's not particularly reasonable that even if you can, that housing should take up such a large fraction of your lifetime earnings).

Re: How I think about debt

#257

Post by toomuchtodo » Mon, May 06, 2024, 11:03 PM UTC

beryilma wrote: post #243

TexanFeller wrote: post #200

I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental heal…

Owning a house does not mean not owing anyone a cent. You still owe multiple types of taxes to the government. You still need to get insurance. You still need to make repairs. I actually find piece of mind in renting. I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.

Rent can increase faster than your income. Owning, even with higher carrying costs, derisks housing both from an expense and sourcing perspective.

Re: How I think about debt

#258

Post by geraldwhen » Mon, May 06, 2024, 11:05 PM UTC

wyre wrote: post #251

rcxdude wrote: post #214

Earlier quoted context omitted.

It's more typical to think of 'affording' in terms of your expected lifetime income, and this is generally a good predictor of people's spending habits. Lending generally enables this. Avoiding debt entirely is a very risk-averse strategy. As ridiculous as house prices are, they are still generally affordable for many (and whether renting or buying is a better overall financial decision is dependent on many factors w…

>As ridiculous as house prices are, they are still generally affordable for many What? Technically this is true because “many” people already own homes and can use that wealth towards another. However, when talking about the unafordability of homes the target market being discussed should be first-time home buyers (unless you have an investment podcast or something). In my HCoL bubble the only people I know that can…

Yes, you do live in a bubble. 65% of US families own a home.

https://www.statista.com/statistics/184902/homeownership-rat...

Most cities aren’t San Francisco and New York City. Even in both California and New York, there are many areas with affordable homes for single income families.

Re: How I think about debt

#259

Post by ianburrell » Mon, May 06, 2024, 11:12 PM UTC

gbalduzzi wrote: post #62

nineplay wrote: post #55

You can take money and pay off your mortgage or you can take that same money, throw it in a low cost index fund, and keep the mortgage. Most people are going to end up better off with the later. Cash has the illusion of being safer but start talking about inflation and it starts to lose its luster.

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…

If you held the stock for more than ten years, you are likely ahead because the stock doubled. If not, you still have money to pay your mortgage.

Most people pay extra to mortgage gradually. Until it is paid off, they face the same risk of foreclosure. What happens if you lose your job with one year left? You lose the house, you can't pay your bills cause banks won't give you home equity loan.

Liquidity is more important for most people than returns. Money saved in a house is a huge risk.

Re: How I think about debt

#260

Post by Nevermark » Mon, May 06, 2024, 11:12 PM UTC

WalterBright wrote: post #140

Nevermark wrote: post #121

Earlier quoted context omitted.

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.

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

(Sorry, deleted that phrase after getting distracted while making my comment. In my mind the edit was instant!)

> What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.

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

Of course there is intrinsic value. A buyer has to pay you what you want for your house.

You are setting the market price.

If someone wants it, thats what they will need to give you.

We often use the word “worth” to mean “what would be the best offer I might get. But you won’t sell it if it is “worth” more than that to you. Which “worth” is usually obvious from context.

Valuations happen on both sides of every trade, and most often both participants end up with surplus value. The seller getting more than their minimum price, the buyer paying less than their maximum price.

Even market makers commonly post prices with surplus relative to their neutral trade valuation, and typically move their price if their are no takers. They want a trade at X, but will try for as much surplus as they can before settling for X if they have to.