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How I think about debt

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Re: How I think about debt

#141

Post by mempko »

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/

It's strange that you would trust a fund manager like Edward Chancellor over a trained anthropologist like Graeber on historical research. The price of time looks a at a small sliver of debt through the eye of interest rates and their impacts.

Chancellor's axe to grind is clear, that manipulation of interest rates by central governments has led to economic instability. Yet historically emperors, kings, and other rulers would periodically wipe the slate clear because debt enslaved too many people causing instability.

Read Graeber's book. It's better researched.

Re: How I think about debt

#142

Post by bluGill »

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.

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.

Re: How I think about debt

#143

Post by voisin »

WalterBright wrote: post #107
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 read my mortgage papers carefully before signing. I made sure there was no early payoff penalty. This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/

In Canada? Who was your lender? I did an exhaustive (I thought!) search when I last got a mortgage and could not find a fixed rate option that did not have a large prepayment penalty.

Re: How I think about debt

#144

Post by WalterBright »

Kirby64 wrote: post #125
WalterBright wrote: post #108

Earlier quoted context omitted.

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 se…

Remember, leverage works both ways.

Re: How I think about debt

#145

Post by abduhl »

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?

The most important things financially are cash flow and coffer size. Being able to take on debt at advantageous times provides both of these things because it allows you to shift cash flow temporally and increase the money you have on hand at will. A rich person can translate portions of their future earnings into large amounts of capital on command, and this can come in the form of future anticipated earnings too (e.g., future anticipated rents or sales) while still being able to live on a day-to-day basis. Being able to control your current and future finances can also provide tax benefits if structured correctly.

Poor people can't do that - they need all of their cash now just to live, all the time.

Re: How I think about debt

#146

Post by mempko »

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

This is a life changing book. It demystifies the biggest part of our lives, which is money (and debt) and helps you contextualize your world by looking into the past. It's the best researched book on the subject.

Re: How I think about debt

#147

Post by hipratham »

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?

https://v.redd.it/s0qwj8td9tyc1

Re: How I think about debt

#148

Post by voisin »

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 takes a lot of government subsidies to make that happen

No doubt, but the upside is a populace not especially at risk to interest rates which is absolutely crushing and systemically risky currently.

> in particular the government assumes the credit risk on something like 85% of US mortgages.

In Canada, CMHC does something similar so I am not sure we get away with anything special that the Americans are not.

Re: How I think about debt

#149

Post by WalterBright »

voisin wrote: post #143
WalterBright wrote: post #107

Earlier quoted context omitted.

I read my mortgage papers carefully before signing. I made sure there was no early payoff penalty. This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/

In Canada? Who was your lender? I did an exhaustive (I thought!) search when I last got a mortgage and could not find a fixed rate option that did not have a large prepayment penalty.

In the US. I don't know much of anything about Canada.

Re: How I think about debt

#150

Post by jp191919 »

mikestew wrote: post #91
trogdor wrote: post #63

Earlier quoted context omitted.

Interesting. Do you know if mortgage rates in those states are higher, to compensate lenders for the increased risk?

WA resident: our mortgage is 2.5% from the credit union. I've not noticed that current rates are any worse than other states I've checked. OTOH, in 25 years of living here, I've never seen house prices go down, only stay steady.

Home prices definitely went down during the great recession.
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