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How I think about debt

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Re: How I think about debt

#181

Post by WalterBright »

schlauerfox wrote: post #158
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.

A house has intrinsic worth. It is a house, people live in it, it provides shelter by it's nature as a house. How many dollars it's worth to others is extrinsic, but it certainly has intrinsic value.

> A house has intrinsic worth

It's value is only what people will pay for it.

For example, a relative of mine died some years ago. She had a house full of expensive furniture. You couldn't give that furniture away, even though it was in perfect condition. It had no value.

The average estate value, excluding land, houses, and cars, is about $900. I have friends who ran an estate liquidation service. You'd net something like 5 cents on the dollar.

This is one reason why I buy stuff at the thrift store. I bought a perfectly good chainsaw there for $10.

Re: How I think about debt

#182

Post by recursivedoubts »

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…

housing is, by definition, a depreciating asset: it wears out

you are asking if real estate prices have fallen over a 20 year period in the US and the answer is not in the modern inflationary era:

https://fred.stlouisfed.org/series/QUSR628BIS

but that mixes land & housing prices together of course

prices have fallen over 10 year periods (sometimes dramatically) however, and the average length of ownership is 8 years, so timing can make a huge difference in outcomes of home ownership, particularly with the leverage involved.

Re: How I think about debt

#183

Post by WalterBright »

bluGill wrote: post #142
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.

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'd delayed another year, the bill would have been a lot higher, as he would charge $150 per sheet of plywood replaced. As it was, only one was water damaged bad enough.

Re: How I think about debt

#184

Post by nickjj »

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?

> How?

Here's an example that could be achievable without needing to be a super high wealth individual, but does require being able to pay a few thousand dollars up front with little notice.

Let's say you get hit with a $3,500 medical bill. The hospital says they're willing to reduce it by 20% ($700) if you pay up front so now your bill is $2,800.

Now, let's say you rarely use credit cards and a major bank will give you $750 cash as a bonus if you spend $4,000 in 3 months. With the medical bill and regular spending you can hit that without making any "extra" purchases.

You could sign up for that card, immediately pay off the $2,800 to avoid paying any interest on the card and once you get the cashback bonus it's really like paying $2,050 instead of $3,500. Now you can take that $1,500 you saved, invest it at 5% for 15 years and with compounding interest you get back +$1,500 profit (minus taxes) which essentially means your medical bill was $500.

Of course this requires luck and timing around being able to do that with the card but even if you didn't have the card bonus you can get a guaranteed 20% return in 1 year by paying it off. The alternative is paying the full amount in smaller payments. Technically a lot of hospitals don't charge interest and give you reasonable plans to pay it off but most other places will charge you interest.

Re: How I think about debt

#185

Post by throw0101d »

yellow_lead wrote: post #93
throw0101d wrote: post #33

Earlier quoted context omitted.

> 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 There's a difference between business finance and personal finance. There's a difference between what needs to be done to start a business and what needs to be done to keep it going. Apple started in a garage, but it is no longer run out of one. Apple started with…

Well, the article specifically references Japanese businesses

In the introduction. He then has paragraphs such as:

> Let’s say this represents volatility over your life. Not just market volatility, but life world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc.

And further down:

> I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps?

Not sure how many businesses experience divorce, family emergencies, career transitions, wayward children.

Re: How I think about debt

#186

Post by tombert »

HeyLaughingBoy wrote: post #174
quadyeast wrote: post #100

Earlier quoted context omitted.

Banks want to insure the collateral.

To the point where if they're notified that your insurance has lapsed, they will warn you to get replacement coverage, or they will and then bill you for it. I had a not so fun experience with switching insurance providers at about the same time that my bank was about to make the insurance payment out of escrow.

That was something we had to worry about when buying our house.

The house I have is pretty old and the roof had some issues. I obviously was planning on fixing those, but it became a bit of a catch-22 problem; the insurance I was planning on using (cuz I had a discount from my employer) said that they wouldn't insure me until the roof was thoroughly fixed and/or replaced, but I couldn't fix the roof until the deal closed, and the mortgage company wouldn't close the deal until we had insurance. We were afraid we'd have to pay the insane insurance rates from the mortgage company.

Fortunately, after multiple days of shopping, I found one insurance company that agreed to insure me as long as I fixed the roof within 30 days of closing, which I did.

Re: How I think about debt

#187

Post by bluGill »

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…

you have to live someplace though. Over the 30 year life of that roof it is cheap enogh but that is a large one time cost if you only are there for 5 years.

Re: How I think about debt

#188

Post by nr378 »

mucle6 wrote: post #168
mempko wrote: post #128

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…

Not trying to be pedantic, just curious. Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.

> Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt.

The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt.

Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.

Re: How I think about debt

#189

Post by mempko »

mucle6 wrote: post #168
mempko wrote: post #128

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…

Not trying to be pedantic, just curious. Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.

The government creates money by spending, but most money is actually created by commercial banks when people take out loans. ALL money is accounted for in these ledgers. So consequently, most money in people's deposit accounts is debt, either their own or someone else's.

I recommend reading the Bank of England's Money Creation in the Modern Economy

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Re: How I think about debt

#190

Post by avgDev »

kgwgk wrote: post #138
avgDev wrote: post #74

Earlier quoted context omitted.

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.

At least the stock market has bounced back, can't say the same about that house.
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