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But does this also include negative wealth? Especially in the US, it seems to me that many people have a lot of debt – staring from credit card debt to a too ex

But does this also include negative wealth? Especially in the US, it seems to me that many people have a lot of debt – staring from credit card debt to a too expensive car lease (and a new one ever 3 years) to the house they have payments on for ~50 years? This way, it seems to me that a lot of people (especially younger ones) have a wealth of ~-10,000€.

toomuchtodo 8y ago
Debt is “bad” when used for depreciating assets (cars, credit cards). Debt is “good” when used as leverage on appreciating assets (real estate) or working assets (tools, business vehicles, servers, or anything else being used to generate cash flow). If I have an interest only loan on something like a taxi medallions (thanks Planet Money for the example!), I generate cash flow with that asset, and can walk away from the debt at any time through bankruptcy of the owning entity, that’s still positive wealth (cash flow). The less capital you need to obtain access to greater amounts of cash flow, the better the cash on cash return/investment quality.
- Matt3o12_ 8y ago
  But real estate debt is only good if you can afford it and you buy smart. I know a lot of people who bought a house and sold it later for less even after all the payments because they bought it high and sold it low. Furthermore, if you pay for something very long, you are also going to be paying a lot of interest. You wouldn’t be paying that long if you could afford it and you would be getting a better credit rate if you could afford it. Unfortunately not everybody is able to invest smartly and thus good debt easily becomes bad debt. It doesn’t help that most people potray reale estates as good debt because they really aren’t that good unless you know what you are doing.
  - deleted 8y ago
    [deleted]
  - AdamM12 8y ago
    Personally don't view this as a necessarily bad thing. Short term losses like this suck but what you learn long term is entirely more valuable than if you did well the first time. Nothing teaches you as well as losing money.
  - shaggerty 8y ago
    Even if your house ends up being less than you bought it for you still have a house. Assuming you want to live in the same area long term it seems wiser to finish a mortgage and be left with a house that's worth less than you paid for it versus paying rent for the same amount of time and ending up with nothing.
    - astura 8y ago
      I think you're ignoring the significant carrying costs of a house. My house last year had over $11,000 in carrying costs in just taxes, insurance,and interest. Never minding the upkeep and repairs (which are significant yet difficult to estimate). There's other hidden costs like opportunity cost, the return on investment you'd be getting if you didn't have that money tied up in your house.
      - toomuchtodo 8y ago
        Houses have almost always kept ahead of inflation, and carrying expenses replace rent.
        astura 8y ago
        Read the post I'm replying to, we're talking about a house that went DOWN in value.
        toomuchtodo 8y ago
        I did. It’s extremely rare for real estate to decline in value, and walking away from the property is always an option if it has (or a short sale, which is must less detrimental on your credit).
        TheCoelacanth 8y ago
        > It’s extremely rare for real estate to decline in value You and I must have very different ideas of what the word "extremely" means. > walking away from the property is always an option That is only true in twelve states. In the other 38, the lender can sue you to recover the difference between the house's value and what you owe even after they foreclose.
  - mi100hael 8y ago
    I think a lot of people incorrectly view personal residences as investments. They don't produce income and their valuation is tied largely to comps which really translates to other peoples' feelings and purchasing power at that time. Mortgaging a home is arguably a poor use of debt unless you're actually able to put a similar sum to work making a higher return elsewhere. If you're investing in real estate by purchasing a cash-flowing property like apartments, then you'd be crazy not to use leverage. You can easily calculate your ROI based on property cashflow and projected value based on rent growth. And your ROI is always going to be bigger if you only put up 25% of the value and let the bank pay for the rest as long as you're cashflowing more than the mortgage payments.
OscarCunningham 8y ago
The probably count mortgages and student loans as negative wealth, and they probably count houses as positive wealth, but they probably don't count degrees as positive wealth even though they should.
- isostatic 8y ago
  Certainly a good educattion is a massive value, but it's not something you can sell - like a house or a car. Your health is also of massive value, and indeed is something you can sell -- a healthy kidney alone is worth $250k.
  - shoo 8y ago
    I would wager that the market value of selling one's own organs (or their replacement cost) is not accounted for in this study.
zulln 8y ago
> to the house they have payments on for ~50 years Yeah, but the house itself is most likely worth at least the same as the loan.
rukittenme 8y ago
You have to define "wealth" if you want a worthwhile answer. After all, debt is a component of a person's assets. If you remember your accounting courses: assets are equal to the sum of all liabilities and equity. Meaning mortgage debt and home equity combine to form your total home assets. A person may have $1m in assets and $900k in liabilities. Or a person could have $200k in assets but $50k in liabilities. Which person is more "wealthy". I suppose its a matter of opinion because, after all, we haven't defined a goal. Is a low debt to equity ratio desirable? Depends on what you're trying to accomplish. Is high cash flow desirable? As an end state, yes that's desirable but what if that end state requires a large amount of debt to achieve?
djrogers 8y ago
> the house they have payments on for ~50 years? Is that really a thing? Do many people really go beyond the standard 30 year term of their mortgages?
- aggie 8y ago
  I don't know anything about the frequency, but if you refinance you can start the 30 year process over. So if you refi after 20 years and go for the 30 year loan you'd be at 50.
twblalock 8y ago
Unfortunately the link from the article to the original report seems to be broken. The standard simple calculation for net worth is assets minus debts, so credit card debt, mortgages, etc. would be negative. But even though the mortgage is negative, the value of the home would be positive, and the net difference between the value of the home and the debt owed on the mortgage could very well be a positive component of net worth.

toomuchtodo 8y ago

Debt is “bad” when used for depreciating assets (cars, credit cards). Debt is “good” when used as leverage on appreciating assets (real estate) or working assets (tools, business vehicles, servers, or anything else being used to generate cash flow). If I have an interest only loan on something like a taxi medallions (thanks Planet Money for the example!), I generate cash flow with that asset, and can walk away from the debt at any time through bankruptcy of the owning entity, that’s still positive wealth (cash flow). The less capital you need to obtain access to greater amounts of cash flow, the better the cash on cash return/investment quality.

Matt3o12_ 8y ago
But real estate debt is only good if you can afford it and you buy smart. I know a lot of people who bought a house and sold it later for less even after all the payments because they bought it high and sold it low. Furthermore, if you pay for something very long, you are also going to be paying a lot of interest. You wouldn’t be paying that long if you could afford it and you would be getting a better credit rate if you could afford it. Unfortunately not everybody is able to invest smartly and thus good debt easily becomes bad debt. It doesn’t help that most people potray reale estates as good debt because they really aren’t that good unless you know what you are doing.
- deleted 8y ago
  [deleted]
- AdamM12 8y ago
  Personally don't view this as a necessarily bad thing. Short term losses like this suck but what you learn long term is entirely more valuable than if you did well the first time. Nothing teaches you as well as losing money.
- shaggerty 8y ago
  Even if your house ends up being less than you bought it for you still have a house. Assuming you want to live in the same area long term it seems wiser to finish a mortgage and be left with a house that's worth less than you paid for it versus paying rent for the same amount of time and ending up with nothing.
  - astura 8y ago
    I think you're ignoring the significant carrying costs of a house. My house last year had over $11,000 in carrying costs in just taxes, insurance,and interest. Never minding the upkeep and repairs (which are significant yet difficult to estimate). There's other hidden costs like opportunity cost, the return on investment you'd be getting if you didn't have that money tied up in your house.
    - toomuchtodo 8y ago
      Houses have almost always kept ahead of inflation, and carrying expenses replace rent.
      - astura 8y ago
        Read the post I'm replying to, we're talking about a house that went DOWN in value.
        toomuchtodo 8y ago
        I did. It’s extremely rare for real estate to decline in value, and walking away from the property is always an option if it has (or a short sale, which is must less detrimental on your credit).
        TheCoelacanth 8y ago
        > It’s extremely rare for real estate to decline in value You and I must have very different ideas of what the word "extremely" means. > walking away from the property is always an option That is only true in twelve states. In the other 38, the lender can sue you to recover the difference between the house's value and what you owe even after they foreclose.
- mi100hael 8y ago
  I think a lot of people incorrectly view personal residences as investments. They don't produce income and their valuation is tied largely to comps which really translates to other peoples' feelings and purchasing power at that time. Mortgaging a home is arguably a poor use of debt unless you're actually able to put a similar sum to work making a higher return elsewhere. If you're investing in real estate by purchasing a cash-flowing property like apartments, then you'd be crazy not to use leverage. You can easily calculate your ROI based on property cashflow and projected value based on rent growth. And your ROI is always going to be bigger if you only put up 25% of the value and let the bank pay for the rest as long as you're cashflowing more than the mortgage payments.

OscarCunningham 8y ago

The probably count mortgages and student loans as negative wealth, and they probably count houses as positive wealth, but they probably don't count degrees as positive wealth even though they should.

isostatic 8y ago
Certainly a good educattion is a massive value, but it's not something you can sell - like a house or a car. Your health is also of massive value, and indeed is something you can sell -- a healthy kidney alone is worth $250k.
- shoo 8y ago
  I would wager that the market value of selling one's own organs (or their replacement cost) is not accounted for in this study.

zulln 8y ago

> to the house they have payments on for ~50 years Yeah, but the house itself is most likely worth at least the same as the loan.

rukittenme 8y ago

You have to define "wealth" if you want a worthwhile answer. After all, debt is a component of a person's assets. If you remember your accounting courses: assets are equal to the sum of all liabilities and equity. Meaning mortgage debt and home equity combine to form your total home assets. A person may have $1m in assets and $900k in liabilities. Or a person could have $200k in assets but $50k in liabilities. Which person is more "wealthy". I suppose its a matter of opinion because, after all, we haven't defined a goal. Is a low debt to equity ratio desirable? Depends on what you're trying to accomplish. Is high cash flow desirable? As an end state, yes that's desirable but what if that end state requires a large amount of debt to achieve?

djrogers 8y ago

> the house they have payments on for ~50 years? Is that really a thing? Do many people really go beyond the standard 30 year term of their mortgages?

aggie 8y ago
I don't know anything about the frequency, but if you refinance you can start the 30 year process over. So if you refi after 20 years and go for the 30 year loan you'd be at 50.

twblalock 8y ago

Unfortunately the link from the article to the original report seems to be broken. The standard simple calculation for net worth is assets minus debts, so credit card debt, mortgages, etc. would be negative. But even though the mortgage is negative, the value of the home would be positive, and the net difference between the value of the home and the debt owed on the mortgage could very well be a positive component of net worth.