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Even if that's their methodology, I don't think it's that ridiculous. It's not like just anyone can go get an $800k mortgage. On top of that, you would stand to

by nilkn 11y ago

Even if that's their methodology, I don't think it's that ridiculous. It's not like just anyone can go get an $800k mortgage. On top of that, you would stand to personally profit on any gains the home might see in the real estate market. To offer a slightly extreme example, I'd consider a recently minted surgeon with $300k in loans, a mortgage, and a $500k base salary to be considerably wealthier than the debt-free small-town auto mechanic making $35k.

mikeash 11y ago
Your extreme example is only going to be backwards for a few months, then the surgeon's proper net worth is going to pull ahead. So I'm not sure that's really worth considering too much. The fact that not everybody can go get an $800,000 mortgage is pretty much accounted for by the fact that you have to put down some sort of down payment, which translates into equity in the house. If you have an $800,000 mortgage then the purchase price for the house was probably $1 million or more, and if the value has held then that's at least $200,000 in net worth. It's true that the owner stands to profit from any gains the price sees in the real estate market, but they also stand to suffer from any losses. It really just makes no sense to count a house's value but not the (negative) value of the mortgage on it. For an extreme case in the other direction, someone with a $1 million house that has a $1 million mortgage on it (because, for example, they bought at a higher price and then prices fell) and who can barely afford their payments (perhaps because they took part in mortgage fraud, or just lost their job) should not be counted as wealthier than somebody with a $100,000 house and no debt. Fortunately, it looks like the actual study does count debt and the wording in the article was just horrible.
- deleted 11y ago
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alextgordon 11y ago
> To offer a slightly extreme example, I'd consider a recently minted surgeon with $300k in loans, a mortgage, and a $500k base salary to be considerably wealthier than the debt-free small-town auto mechanic making $35k. Is this your perception or is it reality? If your hypothetical surgeon overleverages himself to the point where he has less on paper than the auto mechanic, his financial position sounds very brittle. What if there is a large unexpected expense? Like $50k to clean up a mercury spill...
- nilkn 11y ago
  It's reality. The surgeon's monthly gross paychecks will exceed the entire gross annual income of the auto mechanic. I actually crunched some numbers so you can see exactly what I mean. The surgeon's going to make about $26,000 per month after taxes in Texas (picked somewhat arbitrarily as that's where I live). They're going to pay about $3400/month in loans. And if they got an $800k mortgage, their mortgage payment is going to be something like $4800/month. Net income: $17800 (i.e., almost 4x their mortgage payment). Now for the mechanic. Net income: $2400/month. Let's say he gets a $100k home. His payment is about $540/month. So he's got $1860/month left over (i.e., about 3.4 times his mortgage payment). He's actually less equipped to handle any sort of financial duress than the surgeon, all while living a much more constrained and frugal lifestyle and occupying a house with literally one tenth of the value. The mechanic's situation is actually vastly more brittle than the surgeon's, as on top of all of this the surgeon also has drastically better job security. Now, sure, you can cook up an example where the surgeon is stretched too thin (e.g., $3-4M home instead of a $1M home, or a collection of exotic sports cars, etc.). However, the fact that the surgeon was even capable of making those unwise purchases in the first place means that they cannot be lumped into the same financial category as the mechanic.

by nilkn 11y ago

mikeash 11y ago

Your extreme example is only going to be backwards for a few months, then the surgeon's proper net worth is going to pull ahead. So I'm not sure that's really worth considering too much. The fact that not everybody can go get an $800,000 mortgage is pretty much accounted for by the fact that you have to put down some sort of down payment, which translates into equity in the house. If you have an $800,000 mortgage then the purchase price for the house was probably $1 million or more, and if the value has held then that's at least $200,000 in net worth. It's true that the owner stands to profit from any gains the price sees in the real estate market, but they also stand to suffer from any losses. It really just makes no sense to count a house's value but not the (negative) value of the mortgage on it. For an extreme case in the other direction, someone with a $1 million house that has a $1 million mortgage on it (because, for example, they bought at a higher price and then prices fell) and who can barely afford their payments (perhaps because they took part in mortgage fraud, or just lost their job) should not be counted as wealthier than somebody with a $100,000 house and no debt. Fortunately, it looks like the actual study does count debt and the wording in the article was just horrible.

deleted 11y ago
[deleted]

alextgordon 11y ago

> To offer a slightly extreme example, I'd consider a recently minted surgeon with $300k in loans, a mortgage, and a $500k base salary to be considerably wealthier than the debt-free small-town auto mechanic making $35k. Is this your perception or is it reality? If your hypothetical surgeon overleverages himself to the point where he has less on paper than the auto mechanic, his financial position sounds very brittle. What if there is a large unexpected expense? Like $50k to clean up a mercury spill...

nilkn 11y ago
It's reality. The surgeon's monthly gross paychecks will exceed the entire gross annual income of the auto mechanic. I actually crunched some numbers so you can see exactly what I mean. The surgeon's going to make about $26,000 per month after taxes in Texas (picked somewhat arbitrarily as that's where I live). They're going to pay about $3400/month in loans. And if they got an $800k mortgage, their mortgage payment is going to be something like $4800/month. Net income: $17800 (i.e., almost 4x their mortgage payment). Now for the mechanic. Net income: $2400/month. Let's say he gets a $100k home. His payment is about $540/month. So he's got $1860/month left over (i.e., about 3.4 times his mortgage payment). He's actually less equipped to handle any sort of financial duress than the surgeon, all while living a much more constrained and frugal lifestyle and occupying a house with literally one tenth of the value. The mechanic's situation is actually vastly more brittle than the surgeon's, as on top of all of this the surgeon also has drastically better job security. Now, sure, you can cook up an example where the surgeon is stretched too thin (e.g., $3-4M home instead of a $1M home, or a collection of exotic sports cars, etc.). However, the fact that the surgeon was even capable of making those unwise purchases in the first place means that they cannot be lumped into the same financial category as the mechanic.