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How I think about debt

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Re: How I think about debt

#351

Post by throwaway2037 »

rcxdude wrote: post #224
dheera wrote: post #222

Earlier quoted context omitted.

The moral issue I have is that simply put, if I don't have the money for something, I wasn't meant to have that something. I need to earn the money for it, after which I deserve to have that something. However, the most basic clean-and-functional versions of basic necessities (food, water, shelter, and transportation) should be accessible to everyone working a full-time job, in my opinion, without having to spend oth…

Do you believe that taking investment is immoral as well, then? That access to resources should be entirely based on past work/achievements, with no judgement applied to anything to be done in the future? That does seem to be the standard you are applying to yourself, at least. (And again, I do agree that housing is incredibly overpriced in much of the world, it's just that debt vs not doesn't have much to do with it…

    > housing is incredibly overpriced in much of the world
Can we please stop this on HN? No, it isn't -- "much of the world". It is overpriced in tiny areas (with incredibly vibrant local economies) of very wealthy countries. Even if you leave Paris, 25+km outside of the city, the property is suddenly reasonably priced. Same for Berlin. (Forget London!) Same for Tokyo. Same for Milan. Also, mostly we have our parents' generation to blame for outrageous house prices in these tiny areas -- they consistently supported and voted for NIMBY-friendly policies. The solution is "simple", but, politically, very difficult to implement: Make housing a human right, not a casino.

Re: How I think about debt

#352

Post by throwaway2037 »

dheera wrote: post #211
sokoloff wrote: post #207

Earlier quoted context omitted.

It's fine to expect some people to buy a house with cash. I don't think that precludes saving for many years to do so (meaning the median income doesn't need to be $1M/yr).

Unfortunately housing prices are rising so fast that saving for years doesn't necessarily get you there, unless median income is close to ~1M by my back-of-envelope calculations, which include: - taxes (1M is close to 500K after taxes) - money that you need to cut out and put into retirement to sustain yourself from age 65-100 - living expenses and rent until you buy - real estate prices rising the whole time

    > Unfortunately housing prices are rising so fast that saving for years doesn't necessarily get you there
Where? In many, many highly developed countries this isn't true.

    > 1M is close to 500K after taxes
Woah. Where do you live where effective income tax rates are 50% for 1M+? Please don't confuse marginal ("headline") vs effective ("actual") tax rates.

Re: How I think about debt

#353

Post by throwaway2037 »

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…

You are overlooking the scenario where home prices fall. Yes, your monthly payments will be fixed, but your asset will be falling in value.

Re: How I think about debt

#354

Post by throwaway2037 »

tsimionescu wrote: post #195
WalterBright wrote: post #106

Earlier quoted context omitted.

> they'll take your house Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you. I.e. you'll get the equity portion. It's in your mortgage contract. Worth reading.

If your house is still worth enough to cover the debt. If the sale of your house is not enough to cover it (which can happen if you bought during a bubble that burst), will your whole debt at least be forgiven?

In short: yes. Imagine you bought a home using a mortgage in the year 2000 in Silicon Valley. Then you go bankrupt in 2007. Your home will probably have appreciated 100-200% during this crazy period. It is very possible you will receive money back from the bank after they sell your home.

Re: How I think about debt

#355

Post by throwaway2037 »

dmoy wrote: post #206
tsimionescu wrote: post #195

Earlier quoted context omitted.

If your house is still worth enough to cover the debt. If the sale of your house is not enough to cover it (which can happen if you bought during a bubble that burst), will your whole debt at least be forgiven?

It's not forgiven, even in a non-recourse mortgage. So it can still e.g. hurt your credit score. They just legally can't pursue you for it. With a recourse mortgage, they can go through normal debt channels (including wage garnishment, etc).

"[R]ecourse mortgage": It would be better to say "recourse loan". Mortgages are specific to properties. Loans are generic for anything. In my personal experience, non-recourse loans are basically payday loans with horribly high rates. You would never do it, if given the choice. I guess that 100% of home mortgages (in highly developed countries) are recourse by legal requirements.

Re: How I think about debt

#356

Post by anon291 »

qudat wrote: post #309
lr4444lr wrote: post #263

Earlier quoted context omitted.

To each his own, but I get more peace of mind with a larger retirement account due to the low fixed rates we had in the US from 2009 to around 2022. I can't liquidate my house piecemeal when I need money like I can my brokerage assets.

But can’t those all go to zero overnight, leaving you with nothing? The same could happen with a home, but that’s what insurance is for. So I guess the gamble is between a natural or fire disaster or our financial system collapsing.

No they cannot anymore than a house? Unless you purport that Intel truly does not own those giant facilities in Hillsboro, Oregon. Which, you can also have with a house if title falls through.

Re: How I think about debt

#357

Post by throwaway2037 »

voisin wrote: post #67
Nifty3929 wrote: post #59

Earlier quoted context omitted.

I think it's actually the reverse. The house is the only collateral, but traditionally you would still owe the deficit if the collateral couldn't be sold to pay off the whole loan. This is what's changed in recent decades. 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.

> 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…

You should ask your parliament to create the equivalent of Fannie Mae and Freddie Mac in your country. Gov't backed and buys loans from retail/commercial banks under strict guidelines. This helps to create a huge fixed rate mortgage market in the United States. I agree: Fixed rate mortgages are terrific for increasing home ownership. Plus, it moves the interest rate risk from retail people (less sophisticated) to institutions (banks, etc.) (more sophisticated).

Re: How I think about debt

#358

Post by throwaway2037 »

Kirby64 wrote: post #163
WalterBright wrote: post #144

Earlier quoted context omitted.

Remember, leverage works both ways.

Obviously. Which is why 20:1 leverage (5% down) is kind of foolish, since you can quickly become underwater on a house purchase if the value shifts. At 5:1 leverage though, you still maintain enough equity to weather any valuation swings if you have a need to leave and sell the house.

This post is somewhat misleading. If you put 0% down (yes, it is possible in many places), effectively you have infinite leverage. But let's use your 5% example. If you house price falls by 50%, nothing happens to you -- even with huge negative equity. You keep making monthly payments. There is no "weathering" to be done. Sure, at the end, you might have a giant paper loss, but you still have a roof over your head -- that you own.

Re: How I think about debt

#359

Post by ornornor »

_heimdall wrote: post #306

I have always hated the recommendation that people should avoid paying off debt and instead leverage that money in interest paying investments. Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if…

You can always liquidate the investment, pay the house off, sell it, buy elsewhere.

If you’ve invested in volatile titles that can be a problem. But if it’s a bond, it’s quite stable and doable.

Re: How I think about debt

#360

Post by throwaway2037 »

rqtwteye wrote: post #177
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.

It depends on where you live. In CA renting is usually cheaper than a mortgage for the same property. Here in New Mexico my mortgage (2.6%) is cheaper than renting the same thing. With higher mortgage rates it’s not that clear but it still looks favorable knowing that mortgage stays stable for the next 15 years vs rents constantly increasing.

To be clear, no one is getting a 2.6% mortgage these days. Your post isn't a very good comparison. It is better to compare renting today vs taking a new mortgage today.
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