7 ms·

> Never use a credit card for credit. The only kind of credit, or debt, that is acceptable is debt to acquire something whose exchange value is extremely likely

> Never use a credit card for credit. The only kind of credit, or debt, that is acceptable is debt to acquire something whose exchange value is extremely likely to increase, like in a home. The exchange value of most things diminishes or vanishes the moment you purchase them. Don’t be in debt to losers. While true on credit, I would like to point out that the statement "something whose exchange value is extremely likely to increase, like in a home" can only be made by someone who doesn't know history beyond their lifespan and beyond their country (or maybe even beyond their county). The long term value of homes basically doesn't increase. People in their 60s are especially prone to not knowing this, having lived through the greatest asset appreciation period in the history of America, and perhaps in the history of the world. Forced savings may be worth it, but it is forced at the expense of crazy leverage and severe tail risks. 10% downpayment is 10x leverage, 20% downpayment is 5x leverage - would you ever leverage stocks or any other personal investment even by 3x?

barbegal 6y ago
Yeah I completely disagree with this sentiment that debt = bad. You should use debt where it acts as an investment (in the true sense of the word investment, rather than speculation). If you need to take on debt to buy that car that saves you an hour walk to work every day then that is good debt. Is it a good idea to use debt to purchase a house? If we believe in free markets then ownership should have roughly the same cost as renting. But ownership allows you to have more certainty that you won't get evicted x years down the line and that may be a worthy thing to invest in.
- globular-toast 6y ago
  It's only a good debt if you have something useful to do with that hour you save. If it's just to spend more time watching TV then walking to work is the better investment by far.
- theandrewbailey 6y ago
  Debt is risk. What happens when you lose all your income (as millions are right now)? Payments can't get made, and repossessions happen. If losing a job doesn't sound like a disaster to you, you've probably never experienced it, and/or you have the privilege of having a career in an in-demand field.
  - barbegal 6y ago
    And that's why there are products to insure you against this risk called payment protection insurance (PPI). It's a shame that in the UK, PPI is now synonymous with mis-selling. The true cost of debt should be the interest rate and the costs to insure the debt (buildings insurance, landlords insurance, car insurance, PPI...)
    - TeMPOraL 6y ago
      How are they working out right now? It's one thing for an insurer to have a steady but small stream of policy payouts; it's another when half of your customers suddenly need a bailout at the same time.
      - Tomte 6y ago
        Insurance companies buy re-insurance themselves
  - nradov 6y ago
    Repossession is a slow process. As a practical matter a homeowner who loses their job is in a better short-term position than a renter (all else being equal) because eviction for non-payment of rent is much faster than foreclosure.
  - gouggoug 6y ago
    But debt buys you a house when you're done repaying it. If you are renting and you loose your income, the exact same thing happens to you, you can't pay and you might end up without a roof above your head. I would rather be in debt and have a small chance of owning a house, than pay rent for 30 years knowing I will absolutely never own that house.
  - drfuchs 6y ago
    Even if your house gets foreclosed on, they don't confiscate it; you still own whatever equity you have in it, so you get a check when it's sold. Yes, you don't build equity quickly at the start, but still it's better than the rental situation in this regard.
CivBase 6y ago
I did not buy a house because I expected it to appreciate in value. I bought a house because the alternative was to pay rent. Rent is a service. A renter does not get anything of inherent, transferable value out of the exchange. A renter is also subject to the whims of his/her landlord and, from my experience, a renter has to move regularly to avoid rent increases and bad landlords. The majority of my mortgage payment goes towards ownership of a product - my house - which has inherent, transferable value. When I'm ready to move again, I can sell my house and put that money towards acquiring a new one using less debt. Meanwhile, I don't have to worry about landlord problems or rent increases so I can wait to move until I am ready. I'd say that's a perfectly good reason to take on some debt. After all, if that money wasn't going to the bank, then it would just go to a landlord instead. EDIT: I'm not saying rent is bad. It is a perfectly reasonable option for many people depending on their preferences and circumstances. I just wanted to highlight the reasons why I chose to take on some debt to buy a house, regardless of whether it will appreciate in value.
- SloopJon 6y ago
  > The majority of my mortgage payment goes towards ownership of a product - my house For many (most?) people that's not true. Even ignoring that mortgage payments often include property taxes and/or private mortgage insurance, you can expect to pay more interest than principal for the first fifteen years or more of a thirty-year mortgage.
  - earthboundkid 6y ago
    Yes, if you look at your mortgage payments, very little is going to principal. On the flipside, when you rent, you get certain services—maintenance of property and major appliances—that you don't get as a home owner. When I started my mortgage I was surprised at how much money I started spending on home stuff that I never used to spend as a renter. Partly it's because you own it so you have higher standards, but partly you're just eating costs that used to be hidden.
    - wpietri 6y ago
ivanche 6y ago
Spot on! I once read that Warren Buffet doesn't recommend leverage greater than 1.4x and I can only say I agree fully. The fact that most of the people find 5x leverage "normal" is scary.
- barbegal 6y ago
  Yet Warren Buffet has made most of his wealth through either normal leveraging or leveraging using his insurance companies' float. https://www.nber.org/papers/w19681 https://www.nber.org/papers/w19681
  - mcnamaratw 6y ago
    Sure, BH uses some leverage. But much less than 5:1 unless things have changed a lot in the past few years. [Or unless I'm worse than I realize at figuring out balance sheets, which is certainly possible.]
  - gowld 6y ago
    > Yet The very first paragraph says "we estimate that Buffett's leverage is about 1.6-to-1 on average." Pretty close to 1.4
ashtonkem 6y ago
Owning a home is useful in that you must have somewhere to live, and ownership can reduce your cost of living. That’s separate from the price rising, even stable prices allow you to build equity and lower your CoL. My unpopular opinion is that home prices should fluctuate around inflation, barring sudden changes in local population. The utility of a home is effectively fixed, most of us will never afford two, making the ability for them to rise in value faster than wages in the area limited. Furthermore, without maintenance and occasional renovations homes actually degrade, implying that their value should actually slip slightly compared to inflation without occasional infusions of cash.
- anthony_r 6y ago
  It's maybe an unpopular opinion but it is the truth - Robert Shiller has gathered a lot of data that confirms it (prices go along with inflation if you don't compensate for maintenance costs - meaning that the actual value depreciates over time). He writes about it extensively in Irrational Exuberance.
kangnkodos 6y ago
Investing in your primary residence should have a small return, but much less than investing in the market. So from a purely dollars and cents point of view it makes the most sense to live with your parents forever, or find the smallest apartment in the worst neighborhood with the worst commute and the most roommates. But that doesn't make sense. So what does make sense? Look at the opportunity cost of your house. What is your expected small return if you buy a large house vs. your larger return if you get a small apartment and invest the rest in the market? Remember to include all the cost of owning, taxes, maintenance, etc. That difference, the opportunity cost, is what the decision to buy a house will cost you. My opinion is that you should still go ahead and buy the house, knowing the opportunity cost. What are you working so hard for? A nice sized house, a car, vacations, money for retirement. Don't buy a home so expensive that you can't save for retirement that you want or the vacation you want. Banks will let you borrow enough money to get yourself into this situation. It's up to you to figure out your whole financial picture, and buy a house that fits your income. So go ahead and spend your money on those things, as long as they're in balance with each other. A balance that's right for you. Some people really want to retire early. Some people really want a large house. Each person has a different balance that's right for them.
gowld 6y ago
It's also nonsense on its face. The point of credit is to smooth out expense over the useful life (depreciation) of an asset. Cities fload bonds to build roads. People take out loans to pay for cars. As long as you can pay off the debt approximately before the purchase depreciates, then credit and interest is a reasonable way to amortize cost. Waiting until you pay cash deprives you of the value of the asset -- which may be non-monetary. You can't eat money; it is currency for buying utility.

barbegal 6y ago

Yeah I completely disagree with this sentiment that debt = bad. You should use debt where it acts as an investment (in the true sense of the word investment, rather than speculation). If you need to take on debt to buy that car that saves you an hour walk to work every day then that is good debt. Is it a good idea to use debt to purchase a house? If we believe in free markets then ownership should have roughly the same cost as renting. But ownership allows you to have more certainty that you won't get evicted x years down the line and that may be a worthy thing to invest in.

globular-toast 6y ago
It's only a good debt if you have something useful to do with that hour you save. If it's just to spend more time watching TV then walking to work is the better investment by far.
theandrewbailey 6y ago
Debt is risk. What happens when you lose all your income (as millions are right now)? Payments can't get made, and repossessions happen. If losing a job doesn't sound like a disaster to you, you've probably never experienced it, and/or you have the privilege of having a career in an in-demand field.
- barbegal 6y ago
  And that's why there are products to insure you against this risk called payment protection insurance (PPI). It's a shame that in the UK, PPI is now synonymous with mis-selling. The true cost of debt should be the interest rate and the costs to insure the debt (buildings insurance, landlords insurance, car insurance, PPI...)
  - TeMPOraL 6y ago
    How are they working out right now? It's one thing for an insurer to have a steady but small stream of policy payouts; it's another when half of your customers suddenly need a bailout at the same time.
    - Tomte 6y ago
      Insurance companies buy re-insurance themselves
- nradov 6y ago
  Repossession is a slow process. As a practical matter a homeowner who loses their job is in a better short-term position than a renter (all else being equal) because eviction for non-payment of rent is much faster than foreclosure.
- gouggoug 6y ago
  But debt buys you a house when you're done repaying it. If you are renting and you loose your income, the exact same thing happens to you, you can't pay and you might end up without a roof above your head. I would rather be in debt and have a small chance of owning a house, than pay rent for 30 years knowing I will absolutely never own that house.
- drfuchs 6y ago
  Even if your house gets foreclosed on, they don't confiscate it; you still own whatever equity you have in it, so you get a check when it's sold. Yes, you don't build equity quickly at the start, but still it's better than the rental situation in this regard.

CivBase 6y ago

I did not buy a house because I expected it to appreciate in value. I bought a house because the alternative was to pay rent. Rent is a service. A renter does not get anything of inherent, transferable value out of the exchange. A renter is also subject to the whims of his/her landlord and, from my experience, a renter has to move regularly to avoid rent increases and bad landlords. The majority of my mortgage payment goes towards ownership of a product - my house - which has inherent, transferable value. When I'm ready to move again, I can sell my house and put that money towards acquiring a new one using less debt. Meanwhile, I don't have to worry about landlord problems or rent increases so I can wait to move until I am ready. I'd say that's a perfectly good reason to take on some debt. After all, if that money wasn't going to the bank, then it would just go to a landlord instead. EDIT: I'm not saying rent is bad. It is a perfectly reasonable option for many people depending on their preferences and circumstances. I just wanted to highlight the reasons why I chose to take on some debt to buy a house, regardless of whether it will appreciate in value.

SloopJon 6y ago
> The majority of my mortgage payment goes towards ownership of a product - my house For many (most?) people that's not true. Even ignoring that mortgage payments often include property taxes and/or private mortgage insurance, you can expect to pay more interest than principal for the first fifteen years or more of a thirty-year mortgage.
- earthboundkid 6y ago
  Yes, if you look at your mortgage payments, very little is going to principal. On the flipside, when you rent, you get certain services—maintenance of property and major appliances—that you don't get as a home owner. When I started my mortgage I was surprised at how much money I started spending on home stuff that I never used to spend as a renter. Partly it's because you own it so you have higher standards, but partly you're just eating costs that used to be hidden.
  - wpietri 6y ago

ivanche 6y ago

Spot on! I once read that Warren Buffet doesn't recommend leverage greater than 1.4x and I can only say I agree fully. The fact that most of the people find 5x leverage "normal" is scary.

barbegal 6y ago
Yet Warren Buffet has made most of his wealth through either normal leveraging or leveraging using his insurance companies' float. https://www.nber.org/papers/w19681 https://www.nber.org/papers/w19681
- mcnamaratw 6y ago
  Sure, BH uses some leverage. But much less than 5:1 unless things have changed a lot in the past few years. [Or unless I'm worse than I realize at figuring out balance sheets, which is certainly possible.]
- gowld 6y ago
  > Yet The very first paragraph says "we estimate that Buffett's leverage is about 1.6-to-1 on average." Pretty close to 1.4

ashtonkem 6y ago

Owning a home is useful in that you must have somewhere to live, and ownership can reduce your cost of living. That’s separate from the price rising, even stable prices allow you to build equity and lower your CoL. My unpopular opinion is that home prices should fluctuate around inflation, barring sudden changes in local population. The utility of a home is effectively fixed, most of us will never afford two, making the ability for them to rise in value faster than wages in the area limited. Furthermore, without maintenance and occasional renovations homes actually degrade, implying that their value should actually slip slightly compared to inflation without occasional infusions of cash.

anthony_r 6y ago
It's maybe an unpopular opinion but it is the truth - Robert Shiller has gathered a lot of data that confirms it (prices go along with inflation if you don't compensate for maintenance costs - meaning that the actual value depreciates over time). He writes about it extensively in Irrational Exuberance.

kangnkodos 6y ago

Investing in your primary residence should have a small return, but much less than investing in the market. So from a purely dollars and cents point of view it makes the most sense to live with your parents forever, or find the smallest apartment in the worst neighborhood with the worst commute and the most roommates. But that doesn't make sense. So what does make sense? Look at the opportunity cost of your house. What is your expected small return if you buy a large house vs. your larger return if you get a small apartment and invest the rest in the market? Remember to include all the cost of owning, taxes, maintenance, etc. That difference, the opportunity cost, is what the decision to buy a house will cost you. My opinion is that you should still go ahead and buy the house, knowing the opportunity cost. What are you working so hard for? A nice sized house, a car, vacations, money for retirement. Don't buy a home so expensive that you can't save for retirement that you want or the vacation you want. Banks will let you borrow enough money to get yourself into this situation. It's up to you to figure out your whole financial picture, and buy a house that fits your income. So go ahead and spend your money on those things, as long as they're in balance with each other. A balance that's right for you. Some people really want to retire early. Some people really want a large house. Each person has a different balance that's right for them.

gowld 6y ago

It's also nonsense on its face. The point of credit is to smooth out expense over the useful life (depreciation) of an asset. Cities fload bonds to build roads. People take out loans to pay for cars. As long as you can pay off the debt approximately before the purchase depreciates, then credit and interest is a reasonable way to amortize cost. Waiting until you pay cash deprives you of the value of the asset -- which may be non-monetary. You can't eat money; it is currency for buying utility.