I hate debt. I get that from my dad. But, I've had to be realistic about it in my life. I would not have been able to buy my house without a mortgage...

I think debt is good for appreciating assets. I also see it as acceptable for long-term "growth" things like education, business startup. It's horribly upsetting to continue to pay interest on objects that are either valueless already or are getting there.

Of course, with everything being cyclical, an "appreciating asset" is a relative thing. You can't be sure that what you buy is going to grow in value tomorrow.

You guys mentioned this, and I think there's good reason to be concerned about the future of the housing market. I think that way, way, way too many big homes have been built in the last few years, and there will be a huge glut of these things and prices will spiral down. However, I truly hope I'm wrong about that. I just don't see the job/earning picture getting all that rosy; honestly, I don't know who buys these homes today.

And, even worse has been the "compression" factor, where starter homes are now so expensive that it's prohibitive for first-time buyers to actually buy anymore.

 

I'm not so sure. With all due respect, I've been hearing this for 35 years and so far, in good times and bad, I have yet to see it happen.

I think debt, both consumer and business, is here to stay, and has become an important part of our economy. I don't think it should necessarily be looked upon as bad.

If anything, we should focus on living within one's ability to meet one's obligations.

 

Chaz

I don't think you need to look at debt in terms of appreciating asset vs. non appreciating asset. I think debt needs to be viewed as within one's ability to pay vs. beyond one's ability to pay.

Again, the newly married young couple that borrows money to furnish an apartment may very well be fine even though they are borrowing for a depreciating asset. If their income is expected to grow, and their future stream of cash makes it easier to repay the loan, this little bit of debt is not so terrible. It is only when the debt exceeds their future ability to repay do we have a problem.

Again, the issue really isn't one of debt so much as it is one of living within one's means or beyond one's means.

 

I don't remember that-- when was that? not calling the accuracy of your statement into question, just wondering because it seems *everybody* says that house values *ALWAYS* go up... and I've been talking about a housing bubble in the SF Bay Area for several years now...

if you have any specific info: year(s), regions, other details, etc. that'd be cool. I'd like to research it.

 

trit

The housing market crashed in 1987 and remained depressed until about 1992/93. It was nationwide but areas like the northeast were hit very hard. Many people feel that the crash in the housing market was caused by the changes in the tax laws that occurred in 1986.

Simultaneous to this, big business suffered a downturn. This was a period of layoffs and downsizing. In fact, many people did sell houses for significantly less than their mortgage and ended up still owing on a mortgage for a house they no longer owned. This typically happened in places like Kingston, New York where IBM closed it's plant causing many in mid level management to move and get rid of their houses in forced sales. Under these conditions the house usually goes for "fire sale" prices.

While it is true that there were empty store fronts and vacant strip malls, there were many factors involved in this, debt being possibly the least important. Remember, you are not only looking at a recessionary period, but you are looking at the beginning of the Wal-martization of America. Many store fronts and strip malls are still vacant because of this.

None the less, this economic turndown occurred from about 1987 to about 1994. Without pointing a finger and appointing any blame, this period coincided largely with George Bush Sr.'s term in office. You might remember, or have heard the now famous, "Its the economy, stupid".

 

Excellent points, Rob. I'll have to mull this over again. My quick retort on this is that what you mean by "living within one's means" implies keeping the borrowing for depreciating assets in the "noise" level of the overall debt.

I cannot stomach paying interest on devaluating property, and I guess that's why I use that rule of thumb... If it's anything more than noise, I won't buy it unless I can't live without it. The furniture example is a good one. Clearly that's not investing in your future, and clearly the furniture is devaluating... Now, if it increased in value, I'd be much more flexible on the issue.

 

In MI the housing market crashed in '83. I remember it well. I was in my 2nd house at the time. When I sold my first, I doubled my investment. I then lived in the 2nd for 5 years, when I found out I was getting a job transfer. Bad timing! I didn't double my investment that time. Instead I lost money. It was a time when thousands of GM employees were leaving the state -- many going to TX, as I recall. People were selling brand new houses, never lived in, at a loss. But, what's bad for the seller, is good for the buyer and I made out ok in the new town.

 

Trit,
I have had a number of friends in the bay area over the years, and it seems to be a bit of a roller coaster over the past several years.

Rob,
Saving and spending are tied, but I am not sure that one would suffer at the cost to the other. I guess that my feeling has to do with the extremes, and that case I would suppose that both spending and saving could be detrimental.
I really do hope that our economy is not based on the spending that creates the short term debt that we all seem to think is bad, on the other side I am not sure that we will ever experience the kind of issues that Japan has with a lack of spending.
I certainly will concede debt to live within one's means is reasonable, although I do hate having any myself.

 

Ken

Please don't think that I completely disagree with you. I also don't like debt, but my point is that it is sometimes necessary, and sometimes a valuable tool.

I'm sure you'd agree that the real issue is living within ones means. A little debt is fine. Like everything else in life, when you get in over your head, you have problems.

 

If you mean what I think you mean, yes, we agree. A little debt is fine so long as it doesn't exceed the person's ability to repay in the future or put unnecessary strains on the person's ability to survive.