Americans, the Formula Is Easy: More Debt = Less Savings

I didn't know you were Chinese.

 

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That's a good strategy.

 

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That's a great argument. Finally someone with a brain, in this thread...
The thing is that I'm talking from a business perspective. I don't include my house as an asset when I'm dealing with investments, unless I'm actually renting out a house. As far as personal finances go, I'm not really concerned with that.

The reason why I said it would be equity is because when you have a business, you don't report what you own as assets. Instead, you do withdrawals, in the equity section, to pay for whatever you want to buy.

 

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I stopped paying attention to what you were saying back on page 1, when it became obvious that everyone was using the dictionary/economics definition of asset, while you were belaboring accounting semantics. I'm not ashamed to admit that I'm somewhat ignorant of accounting terminology, for the reason that accounting is some boring shit. It's the intellectual equivalent of manual labor.

This whole digression is fundamentally stupid. It doesn't matter what accountants call "assets", "investments" or "equity." The article you posted at the start of this thread, and the subsequent discussion, are about personal finances and macroeconomics, so you can take your "business perspective" and shove it. I wouldn't have had to double-post the wikipedia link if you'd bothered to read it:

"Similarly, in economics an asset is any form in which wealth can be held."

Is it not obvious to you that this is the definition that everyone is using, and, moreover, the pertinent one? Does it really make a whit of difference to America's financial and economic position whether people call their houses "assets" before they actually sell them?

 

I guess that's the general feeling of the american population. No wonder there's so much debt there...

Yes. You can lose a lot of money in the sale. You can also lose control of your liabilities. I can go out right now and purchase a car on credit. I will add that to my liabilities, and that will not produce any money. In fact, that will increase my monthly expenses. And then I have to pay interest, which increases even more my liabilities.

You see, whne it comes to investing, we have a nice ratio which measures how well a business is doing. You divide current assets by current liabilities, and that gives you a ratio which measures how likely you are to paying your debt. If you buy a house, a car and a whole bunch of things that increase your liabilities but do not produce any money, you are decreasing that ratio.

A ratio of 1 is kinda acceptable. But less then that means that you are not very likely to pay your debts.

So let's say you go and buy a house for yourself. You pay $10,000 for the downpayment and a mortgage of $90,000 goes to your liabilities. Then you go an buy a car on credit. You start paying $2,000 per month, which also goes to your liabilities. Meanwhile, you are not producing any income, but you have to pay $4,000 per month from your liabilties. What is your ratio? Obviously below 1...

You see... the value of your house actually goes to your liabilities, because you have to pay for it over a long period of time. Since your house is not producing any income, you are getting lots of expenses, but no income. Would you invest in a business that gets lots of expenses and no income?

The asset you use to pay your bills is basically your personal qualifications that allow you to have the job you have, which produce your income. Not your house. Your house does not produce any income.

 

Truthseeker,

Thanks for finally clearing up that you have only been concerned with the relationship of a personal home with that of a business. Of course in that case you wouldn't list a home as an asset of the business. Of course you also wouldn't list it under the equity section of a business either.

The problem has been that the discussion centered around an article that dealt with personal finances, not a business, which is why the author of the article and others in this thread have pointed out that a home is an asset. However since it seems that you do understand this, we can all move on to other things in life.

 

You are arguing that people shouldn't buy themselves houses to live in because it's a bad investment. Do you really believe this?

Your application of business finance ideas to personal finance misses all of the salient points. I'm not even convinced you really understand them in the business context to begin with. Why don't you take a look at this page:

http://en.wikipedia.org/wiki/Personal_finance

In particular:

"On your personal balance sheet, you list all your assets (e.g., car, house, clothes, stocks, bank account) and give their values. You also list all your liabilities (e.g., credit card debt, bank loan, mortgage) and give their values. "

Thanks for playing, numbnuts.

 

Yes. It's much better to just pay less in rent and invest the rest of the money you would have used in liabilities. It's particularly easier in the US. Canada is much tougher to invest, particularly real estate. Delaying gratification is the key to precise and fast growth.

And you have no idea about it.

So? It is a general misconception. You don't earn money from your house. The whole purpose of an asset is to produce capital. The banks and the government love this misconception, btw...

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http://www.investopedia.com/terms/a/asset.asp
"1. A resource having economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

2. A balance sheet item representing what a firm owns.

1. Assets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment.

2. In the context of accounting, assets are either current or fixed (non-current). Current means that the asset will be consumed within one year. Generally this includes things like cash, accounts receivable and inventory. Fixed assets are those that are expected to keep on providing benefit for more than one year, such as equipment, buildings, real estate, etc."

Note the caveat "with the expectation that it will provide future benefit".

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Wow! I can tell you one thing for certain - never consider going into business as a financial consultant. You'd be laughed out of existence in the first week!

 

Truthseeker,

A home is an asset. The definitions of an asset that you are providing only reinforce the concept that a home is an asset. What is the future economic benefit of owning a home? Well, at any time you can always sell the house. That certainly fullfills the idea of future ecomomic benefit--doesn't it?

Even if you don't sell the home, your equity increases as the value of the home increases. That provides a current economic benefit.

So, yes, a house is an asset. I really don't understand why you'd think otherwise.

As to your arguement that renting is better than owning a home that just isn't the case. Either way you are going to have a living expense. In renting you don't gain any equity. In paying a mortgage you'll gain equity. Why? Because you will eventually own the house, you don't own something that you rent, someone else owns the property. Owning a home in the US is a good thing--the housing market is strong. Perhaps in Canada the housing market isn't as strong, I don't know.

 

He seems to not understand that there CAN be little difference in the cost of owing compared to renting. And with owing (buying) you most likely will receive some - if not a considerable amount - on your investment. While renting returns you nothing.

His theory seems to be that it costs considerably more to buy than to rent and that you should invest the difference in something that will generate an income for you. But there is only a very small degree of truth in that and it isn't really a practical plan for most people. He's completely ignoring the tax breaks - both federal and state in the U.S. - that a mortgage holder gets, among other things.

I too know nothing about market conditions nor rental prices in Canada. But in the U.S. buying a home is one of THE most sound investments anyone can make.

 

Theoretical question: it's accepted that housing prices will always grow (for the exception of the economically distressed regions). It's accepted that housing prices will lead inflation. If an average income = stagnant base+inflation (which seems to be the case for majority), housing prices will carve greater and greater piece of an income. Certainly, 100% is the limit. Thus, even in the absence of economic upheavals, housing bubbles, etc. universal expectations of the continuous growth of housing prices (with corrections on inflation) are misteriously irrational. In the best case, it's protection against general inflation.

Let's assume unlikely scenario when an average income will grow in the real terms. Then again, there is some upper limit for housing prices/income above which an average Joe will stop buying. One can assume that ratio average housing prices/average income will remain fairly stable. In this case, owning a house is just a protection against housing inflation. Not much wealth building, unless one is downsizing his McMansion to the next one on the perch.


There is something sad that people treat their homes as assets, not as homes to live in.

 

Just a few comments in general.

First, there can always be some negative situations develop but they are generally rare compared to the overall housing market.

There are three things that drive the housing market forever upward (again, generally). The population keeps increasing and those new families need a place to live; available land for new housing keeps getting farther and farther from centers of work, shopping and schools; and a combination of inflation/ wage increases.

I've also known several people, on is my own brother, who will buy "fixer-uppers", make major/minor repairs and sometimes expansions and then sell them later at a decent profit.

Also, keep in mind that in the U.S. we've become a very mobile society. People are constantly relocating due to jobs and other factors and this alone preserves a fairly active housing market. But the three factors I listed earlier are the prime reasons behind constantly rising prices.

 

Thank you!

That's exactly what I'm saying! But there's a whole bunch of morons here that knows nothing about economy! :bugeye:

 

The housing market mimics the overall market. If the overall market is in decline, the housing market will also be. Generally, the market goes up and down. There's both inflation and deflation. And the same happens with the housing market. The inflation and deflation periods are often determined by the avaiability of jobs, wages, governement expenditures, the amount of cash circulating, amongst other things.

Do you know anything at all about economics?

Again, it is not forever. A recession can be delayed for many years. But as much as it is delayed, as worse it will be. Soon the Keynesian model will not suffice. SPecially when you are dealing with a global economy...

Those houses are assets. That's because they are investments. That's a whole different story from your own house....

That's called "real estate investment". It's when you add value by fixing it up and making improvements. By adding value, you increase the selling price. The beauty of adding value is that you can also raise rents, as well as sell for a higher price even if the housing market don't move upward. In that sense, it is much less risky then just buying and selling houses. It is also less risky if you always rent your houses and make allowances for possible vacancies. You can also take advantage of some tax laws...

 

So, you're saying that instead of buying a house, I should rent a house and invest the difference in... real estate? You do realize that a house IS real estate, right?

Suppose I would have to pay twice as much per month to buy a house instead of rent. If I rent and invest the difference, I'm only putting half as much income towards the investment as I would if I were to buy a house. For the rent/invest strategy to come out ahead, then, the investments have to grow much more quickly than the housing market. That implies higher risk to get the SAME returns, and a *much* higher risk to get better returns. The only situation where it would work is if you must live somewhere with extremely low rents and extremely high housing prices. But situations like that are the exception, and are inherently temporary: all it means is that you should wait for rents and prices to equalize before you buy.

Home ownership is a future benefit of buying a house. Only a hopeless ignoramus would deny this.

 

But if you buy the house and live in it while fixing it up and making improvements, it suddenly ceases to be an investment? If you do the balance sheets, you'll see that there is no difference between living in your house and renting it out, since the rental income will be cancelled out by your own rental expenses. This is why everybody lives in the first house they buy.

 

Not necessarily. You may, but there are many kinds of investments....

A real estate investment is completely different from real estate ownership for personal use. That's the difference I'm trying to stick in your minds.

Which they often do. Investments can have ROIs of greater then 30%.

Risk is relative to knowledge. You can minimize risks by aquiring knowledge. Did you know we live in the Information era?

Besides, buying a house and waiting for the value to grow has a MUCH LOWER ROI then many other investments. Including real estate investment. Unless you rent your basement to somebody else, buying a house for yourself is not a good investment at all.

Only a hopeless ignoramus would BELIEVE that. Home ownership has no future benefit for you. It may have benefit to the bank, but not for you. If you manage to pay the mortgage, even after spending years and years paying it without any return, you may or may not sell it at a reasonable price. If you want to be a serious investor, you need to learn how to deal with risk, with losses, and maximize returns by creating positive cashflow, rather then depend on the market to have a capital gain 20 to 50 years after the purchase.

 

It is not an investment if you are using the house. Generally, people make improvements for themselves, so that they can have a better experience. They don't make improvements with the purpose of adding value.

Rental income is not equal to rental expenses. If it is, then you don't know how to invest in real estate. Generally, rental income is higher then what the rental expenses would be.

Of course you can even lose money when investing in real estate. For example, you can buy a house and renting out not taking into account expenses other then the mortgage. Then, chances are you are going to get a negative cashflow with your investment, which is not fun. In the same way, you can get higher rental income if you invest properly. For instance, you can research how much houses cost in a certain area. Then, you can find a house which has a lower cost but with the same quality. If you buy that house, you will get a discount on the purchase and will be able to charge the same amount of rent of the rest and gain from that. In the same way, you can buy a house that needs to be fixed, or has any kind of problems such as tenant problems. Then, once you solve the problems, you can raise the rent as you increased the value of the property. Once again, you have a gain.

It's all about adding value. It's often a matter of around $100. But when you add things up, do amortizations and other calculations, you can substantially increase your ROI.

 

The first step to managing risk is to develop a solid, low-risk financial base to work from. For an individual, this is your house.

You don't have to live in your house for 20-50 years before selling. You can make the exact same capital improvements to it that you would while renting it, and flip it after five years for a profit. Then you spend the proceeds on buying a bigger, better house, and repeat. Once your house is as big as you need for yourself, you leverage it to buy another house, which you then rent while fixing up, and so on. This is exactly the same as your business plan, only you live in the first house you buy. Note that this is how everyone in the world does it.

Those are the exact same thing, nimrod.

I don't think we're talking about the same thing... By rental expenses, I was referring to the money you'll have to pay to rent a place for you to live in. For this to be significantly different than the rent you charge people to live in your house, the place you rent has to be much crappier than the place you own, or very far away. And who wants to do that?