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Another issue with just using averages and math: say you're looking at the housing crisis 10 years ago. Math says that the middle class actually had a net gain
by xhrpost 8y ago
Another issue with just using averages and math: say you're looking at the housing crisis 10 years ago. Math says that the middle class actually had a net gain in wealth because when your house gets foreclosed on, you no longer have all that debt. 2006 -> buy $200k house with $190k mortgage. 2008 -> House worth $130k, still owe $175k. So net worth is -$45k. (This is not yet accounting for toxic assets in which you could assume the house not to be sellable and the owner thus a full $175k in debt). Owner defaults, net worth is now $0. A mathematical net worth increase of $45k, even though most people would agree this is a bad thing.
- eyeinthepyramid 8y agoexcept, of course, for all the retirement funds that disappeared.
- wahern 8y agoA home mortgage is secured by the home and is usually non-recourse. Your personal net worth can never go negative because of the mortgage liability. It's all upside as far as the homeowner is concerned, or at least loss is limited to your initial down payment. The price for this is the interest rate you pay, which has factored into it a risk premium; and if you don't make the industry standard 20% down payment you literally pay for additional mortgage insurance. A secured, non-recourse loan is not a personal liability. In terms of accounting, it's its own thing, like a limited liability company. That's how you need to think of it. For better or worse there's no place in a cut-throat capitalist society for people who can't wrap their heads around that.