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"Even people with good jobs can owe so much on credit cards, student loans, or mortgages that, on paper, they’re worth less than zero." So, by that rationale,

"Even people with good jobs can owe so much on credit cards, student loans, or mortgages that, on paper, they’re worth less than zero." So, by that rationale, almost everyone with a mortgage is "broke"? Because, generally (except in recent times where money is cheap to borrow), you get a mortgage when you don't have the cash to buy a house outright (and probably won't for decades).

euroclydon 10y ago
It doesn't work that way for secured loans. So you can take out a $250K loan on a $300K house, and it results in +$50K in net worth. For credit card loans, there is no underlying collateral. For student loans it's the same.
analyst74 10y ago
This article is talking about negative wealth, not just people in debt. Meaning that the small number of homeowners who have negative wealth have debt (primarily student loans) larger than their home equity and other investment.
- kstenerud 10y ago
  And what about the early years of a mortgage, where your home equity is very low?
  - graedus 10y ago
    "It doesn’t feel good when your net worth is a negative number. But many of these debtors aren’t necessarily doing something wrong. It can make sense to borrow when you’re young—to get an education, buy a home, or even sometimes to meet emergency expenses—as long as you’re pretty sure you can pay it off later when you’re earning more money."
ocdtrekkie 10y ago
Yeah, I mean, it's tough to evaluate this with that thrown in, because it's technically a debt, but you have an incredibly long time to pay it off. If you're managing your money well, it is not a huge risk. I could not pay off my mortgage now outright, but I could make payments on it for YEARS even if I lost my job. So I don't consider myself "broke", even though this definition would suggest that I am. Your first goal to financial security, if not a positive net worth, should be ensuring you have enough padding in your savings to handle unpredictable events like loss of job.
deleted 10y ago
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mathattack 10y ago
By "broke" they mean liabilities are more than assets. So if someone uses credit cards to pay for a $3,000 vacation, they have $3,000 in debt and no measurable asset. If someone takes a $300,000 mortgage to buy a $300,000 house, the asset equals the liability. (Minus transaction costs and all that good stuff) If the house increases in value to $500,000, they are $200,000 in net assets minus whatever they've paid down. If the house value drops $100,000 below the mortgage, then they're still negative. (In much of the US, houses are still worth less than what people paid for them 10 years ago)
- deleted 10y ago
  [deleted]
tlarkworthy 10y ago
No that isn't a negative becuase you can sell the house and pay back the mortgage, as long as it's value hasn't nosedived.
tomp 10y ago
No, it's relatively easy to estimate the "net value" of a mortgaged house, which should (except in a housing market crash) be positive, otherwise the bank wouldn't lend you the money in the first place. On the other hand, it's very very hard to calculate e.g. net "student loan value" (i.e. future earnings - future loan payments) - in fact, many people took out huge student loans but found themselves making way less income than they expected (hoped for)! Unfortunately, lenders don't care about that, becaue the government guarantees the loan...
micheljansen 10y ago
I agree that it's not a very useful definition of "Broke", but you can sell the house, pay off the mortgage and (probably) have money left. With student loan debt etc. there is nothing on the other side of the balance sheet (except from hopefully higher earning potential over the long term).
nommm-nommm 10y ago
Net worth = assets - liabilities An asset is a house, a liability is a morgage. Taking out a morgage doesn't effect your net worth because while you add a liability you also add an asset that counteracts that liability.
cmdrfred 10y ago
From the article: "It turns out credit cards and student loan debt are the main reasons Americans are ending up with a negative net worth. Mortgages are a minor factor, the New York Fed found. Only 19 percent of people with negative net worth are homeowners"
- dragonwriter 10y ago
  The recent housing finance crisis converted a lot of negative net worth homeowners to not-homeowners (whether of negative net worth or otherwise) -- by both procedurally streamlining and reducing social stigma attached to various methods of getting out from under mortgage debt. (Of course, it did so only after first producing a lot of negative net worth homeowners out of people who were positive net worth homeowners, so its not clear where the net effect is.)

euroclydon 10y ago

It doesn't work that way for secured loans. So you can take out a $250K loan on a $300K house, and it results in +$50K in net worth. For credit card loans, there is no underlying collateral. For student loans it's the same.

analyst74 10y ago

This article is talking about negative wealth, not just people in debt. Meaning that the small number of homeowners who have negative wealth have debt (primarily student loans) larger than their home equity and other investment.

kstenerud 10y ago
And what about the early years of a mortgage, where your home equity is very low?
- graedus 10y ago
  "It doesn’t feel good when your net worth is a negative number. But many of these debtors aren’t necessarily doing something wrong. It can make sense to borrow when you’re young—to get an education, buy a home, or even sometimes to meet emergency expenses—as long as you’re pretty sure you can pay it off later when you’re earning more money."

ocdtrekkie 10y ago

Yeah, I mean, it's tough to evaluate this with that thrown in, because it's technically a debt, but you have an incredibly long time to pay it off. If you're managing your money well, it is not a huge risk. I could not pay off my mortgage now outright, but I could make payments on it for YEARS even if I lost my job. So I don't consider myself "broke", even though this definition would suggest that I am. Your first goal to financial security, if not a positive net worth, should be ensuring you have enough padding in your savings to handle unpredictable events like loss of job.

deleted 10y ago

[deleted]

mathattack 10y ago

By "broke" they mean liabilities are more than assets. So if someone uses credit cards to pay for a $3,000 vacation, they have $3,000 in debt and no measurable asset. If someone takes a $300,000 mortgage to buy a $300,000 house, the asset equals the liability. (Minus transaction costs and all that good stuff) If the house increases in value to $500,000, they are $200,000 in net assets minus whatever they've paid down. If the house value drops $100,000 below the mortgage, then they're still negative. (In much of the US, houses are still worth less than what people paid for them 10 years ago)

deleted 10y ago
[deleted]

tlarkworthy 10y ago

No that isn't a negative becuase you can sell the house and pay back the mortgage, as long as it's value hasn't nosedived.

tomp 10y ago

No, it's relatively easy to estimate the "net value" of a mortgaged house, which should (except in a housing market crash) be positive, otherwise the bank wouldn't lend you the money in the first place. On the other hand, it's very very hard to calculate e.g. net "student loan value" (i.e. future earnings - future loan payments) - in fact, many people took out huge student loans but found themselves making way less income than they expected (hoped for)! Unfortunately, lenders don't care about that, becaue the government guarantees the loan...

micheljansen 10y ago

I agree that it's not a very useful definition of "Broke", but you can sell the house, pay off the mortgage and (probably) have money left. With student loan debt etc. there is nothing on the other side of the balance sheet (except from hopefully higher earning potential over the long term).

nommm-nommm 10y ago

Net worth = assets - liabilities An asset is a house, a liability is a morgage. Taking out a morgage doesn't effect your net worth because while you add a liability you also add an asset that counteracts that liability.

cmdrfred 10y ago

From the article: "It turns out credit cards and student loan debt are the main reasons Americans are ending up with a negative net worth. Mortgages are a minor factor, the New York Fed found. Only 19 percent of people with negative net worth are homeowners"

dragonwriter 10y ago
The recent housing finance crisis converted a lot of negative net worth homeowners to not-homeowners (whether of negative net worth or otherwise) -- by both procedurally streamlining and reducing social stigma attached to various methods of getting out from under mortgage debt. (Of course, it did so only after first producing a lot of negative net worth homeowners out of people who were positive net worth homeowners, so its not clear where the net effect is.)