Have I been fooled about wealth distribution?

[JamesATyler]

I went to check the numbers on the Wikipedia about who had the most wealth and what it consisted of. Right in the first paragraph:

Wealth in the United States is commonly measured in terms of net worth, which is the sum of all assets, including the market value of real estate, like a home, minus all liabilities.[1] The United States is the wealthiest country in the world.[2]

Affluence in the United States - Wikipedia

The thing it doesn’t point out is that those loans are assets to the creditors. I already knew that Americans were heavily into using credit to acquire assets. So, for instance, if a young couple just started out in life and bought a house and two cars on loan, it would make them a negative number for wealth. Like $-200,000. The creditors would be $+200,000. Then that wealth would be distributed to the couple over time, as they make payments.

I have not done a complete analysis but wouldn’t this make large creditors look like they possess large amounts of wealth, when that wealth is actually be distributed to the debtors over time?

What had made me curious is that people like to talk about how much the wealthy possess but anytime the wealthy get something it is through trade. So whatever the wealthy gets from an average person, the average person got some product or service of equal value. Yet many products and services are consumable but the money is not. So the average person sees his assets disappear after they are used in those cases. But some assets like land and homes can appreciate overtime.

I wonder what the distribution would look like if we only included what was fully owned.

Edit: Also, does their analysis include all assets? Do they account for my clothing, furniture, etc. Most people have acquired, or are in the process of acquiring assets through credit, many 1000’s of dollars worth of assests in their homes.

 

[ProdglArchitect]

Could you be a little clearer on how you think you were fooled? I don’t think the numbers would change much on the wealthy side of things because, apart from speculative investments, they tend to own things outright. As for on the poorer side of the spectrum (destitute through upper middle class), removing things that are not fully owned would probably drastically reduce household net worth because very few families actually own their houses completely. Renters probably wouldn’t see too sharp a decline though.

 

[midori]

I’m probably in the minority, but I sort of ignore a bunch of those statistics, because there’s so many different ways to run the numbers.

So-- for me, I buy sad little houses, fix them up so that they’re decent little houses, and then rent them out. I live in a poor, small, rural town, where real estate prices are very sensible.

So-- suppose I buy a sad little house that is so decrepit and ghastly that it sells for $4k. Then I spend $20k of my cash buying materials to fix it up— new roof, central heat & air, new flooring, new light fixtures, new paint, new ceiling, new hot water heater, insulation, dishwasher, stove, fridge, etc. DH also puts in several hundred hours of labor over countless nights/weekends, for which he doesn’t get paid. At the end of the day-- we have a house that will probably sell for $30k on the open market. And it rents for $425/month, so in an ideal world, it brings in about $5k/year, out of which taxes and insurance come, but I also have to not forget about vacancy and turnover.

So-- how do I count it as an asset? Is it a $4k house, which is what it started off as? It has the potential to be a $30k house— but I’m buy-and-hold; I don’t sell. That $30k means nothing to me because it doesn’t exist. The house, to me, represents -$24k , because of all the money that went to the roofers, electricians, plumbers, central heat & air guys, handyguys, and Lowes, but what about the value of our time that also got sunk into it? At the same time, it also represents $425/mo to the positive for me, which is awesome… and that’s how I perceive it. I view it as an investment that’s worth about $5k/year, and that $5k/year goes to improving the next little $4k house I can find. But the thought that my house is worth “$30k” doesn’t do me any good when I have a turnover, and I need to come up with $2k in my pocket to cover materials for paint/flooring/whatever, plus labor.

So because I find it difficult to perceive/calculate my personal assets, trying to look at what “my neighbors” have doesn’t make much sense. I’m more interested in, “How does my monthly income compare to my monthly outgo?” and “Can I make my bills?” and “Can I absorb this emergency” and practical things that relate to liquidity. Paper wealth can disappear in a moment. Which is why I got into rentals in the first place… because if my money is going to disappear, I want to have control over how it vanishes.

On a side note… I totally love the fact that the theoretical household in the Wikipedia example has almost-a-million-dollar house, stock, mutual funds, an IRA, and their own company… and a $30k car. I think that’s, like, one vehicle (if you’re lucky) these days…

 

[JamesATyler]

I can only try but I don’t know enough about finance and might be making errors. Example, if a bank has issued a loan for 100k, does that loan count as a 100k asset even though nothing has been paid on it. If so, i feel the net worth of the bank is greatly exaggerated because they only have a piece of paper. Does the debtor count the unpaid for house as an asset? If the house is worth 100k is it added to the total assets and then the full mortgage deducted. Over 30 years that full mortgage might be 200k after interest and all. So he would be 100k in the hole on paper.

In the simplest terms, the only real wealth that is added to the creditor is the interest amount, but only over the term of the loan. The principle amount is a trade for the property. But, if one deducts the full mortgage, that would be paid over the next 30 years, immediately it appears to put the debtor way in the hole in the present.

If that is the way they are calculating distribution, it seems to factor in the future into the present. It seems like it would be needed to only calculate the equity of the loan. So instead of counting the loan as an asset, we should only calculate what has been paid on the loan. If the whole mortgage was 100k and the debtor had paid 50k and acquired an equity of 40k in his house, then the real transference of wealth is the 10k in interest.

 

[Mary888]

And you salvage existing houses and this is good for ecology. :hugs:

 

[JamesATyler]

As for rotating debt like Visa or Mastercard, those outstanding loans count as assets in the full amount, I assume. On paper they are worth billions. However, if a debtor used his visa to purchase 1k of grass seed, is the grass seed counted as an asset on his balance sheet. My guess is no. So the creditors look like they recieved the 1k for nothing. In actuality, it is only the interest paid on the debt that is added to the creditor, but only over the term of the repayment. Again, we have to factor future transference into the present. In the present, only the amount of interest already paid has been transferred.

 

[JamesATyler]

Am I right in thinking that if the full mortgage is deducted against the current value of the house, then we account for 30 or 15 years of payments and show what wealth will be transferred at the end of the period but do not account for the change in value of the house at the end of the period or any change in the value of money due to inflation? If that is what they are doing, then it seems wrong. On the debtor’s side we only show current value against 30 or 15 years of value on the creditor’s side. Right?

 

[CatholicSpirit]

Count to a billion and determine that each dollar can buy seeds to start a plantation. Money disporportioned among the masses? Do the math. If every billionaire set aside a fund among the 100+ countries with greenhouses to plant food developing plants and trees, using 15% of their wealth, how many starving people would begin to survive? The problem is the wealth in the land beneath them for generations to come.

 

[Mary888]

I foresee a future economical war between governments and banks. And it will be emotional on both sides, each side will present their side to the public. Those who own property will side up with the banks. Those in debt to the banks will side up with governments.
The only thing important is that on either side we lay neither the banks nor the governments are our saviors. They follow their own interests.
We have to accept that we will lose some money and property. My guess is that this economical war will prevent for the system to just fall like in 2008. And this will be a gain for everyone even if in smaller amount than what we want.

 

[shainski]

Your analysis seems flawed.

prior to lending the money, the bank had the money. After the transaction, the bank has the deed to the property and the promise to get paid back the loan plus interest.

The homeowner has the value of the property less the value of the loan. (If the homeowner borrowed 100% of t he money, the homeowner’s net worth is zero (Assuming there are no other assets). The bank has the amount of the loan as an asset.

So one second after the loan is made, both parties have the same net worth as they had one second before the loan was made. No wealth was created by the transaction.

 

[Gorgias]

So one second after the loan is made, both parties have the same net worth as they had one second before the loan was made. No wealth was created by the transaction.

Hmm… no.

The bank also has the value of the loan, which is not only the principal but also the interest due to them. By that standard, wealth has been created. (The bank takes the risk that the loan will be repaid in full, and the homeowner takes the risk that the house will increase in value and more than offset the cost of interest. But, the loan creates additional value.)

 

[Gorgias]

That $30k means nothing to me because it doesn’t exist.

Except that, if you needed to liquidate it, you could… and suddenly, that $30K would be exceptionally meaningful to you.

 

[shainski]

Eventually, the loan will produce value when the interest is paid. But one second after the loan is made, no interest has been paid - only a promise exists. The wealth will be created with time and repayment. Presumably the property was valued at a current fair value - so the property has not increased nor decreased in value at that moment.

 

[JamesATyler]

The bank also has the value of the loan, which is not only the principal but also the interest due to them. By that standard, wealth has been created. (The bank takes the risk that the loan will be repaid in full, and the homeowner takes the risk that the house will increase in value and more than offset the cost of interest. But, the loan creates additional value.)

That is what i was trying to figure out. If that is the case then they are comparing things in two different time frames. The bank will only actually possess that mortgage fully many years down the road. Deducting the full mortgage from current wealth deducts money he won’t possess for many years. It doesn’t see like a good what to do it.

 

[JamesATyler]

Can you explain? I might be uneducated but you seem useless at present.

 

[JamesATyler]

Thanks for your enlightened (name removed by moderator)ut.

 

[Gorgias]

If that is the case then they are comparing things in two different time frames. The bank will only actually possess that mortgage fully many years down the road. Deducting the full mortgage from current wealth deducts money he won’t possess for many years.

Hmm… not sure what you’re saying.

Let’s take an example. Suppose you take out a mortgage on a $200K house. Let’s suppose that, over the length of the loan, you’ll end up paying $300K on the mortgage.

What you get now is the use of the money to buy the house. What the bank gets now is note that entitles them to hope to collect $100K in profit (i.e., the interest) over the length of the loan.

What you get in time is an investment that you hope is worth more than $300K. What the bank gets in time is $300K on a $200K investment.

You take possession of the property immediately (valued at $200K), and the bank has possession of the mortgage immediately (valued at $300K). Both of you take a risk. At the end of the mortgage, $300K has exchanged hands. Wealth has been ‘created’.

 

[upant]

are you really a deacon?

since you are so knowledgeable, explain it to them in easy layman’s terms

or do you prefer just to snipe.

 

[1Lord1Faith]

Loans that a bank issues are not necessarily an asset to a bank. They are a liability. They represent risk for the bank. What the bank has collected on the loan becomes part of the bank’s assets. This is why banks do amortization the way they do.

 

[midori]

Heh. Only if the moon and the stars are aligned.

The real estate market in our (small, poor, isolated, rural) town is also tied to oil and gas. When oil is at $100/barrel, houses are flying off the proverbial shelves. When oil is at $20/barrel, the real estate market is nonexistent. I could probably pull of a sale at a moment’s notice if I dared to venture into owner-finance/rent-to-own territory, but that’s totally not my cup of tea-- and definitely wouldn’t give me a nice juicy lump sum.

They could be useful in being used as collateral for a bank loan… but those bank loans are generally from 1-5 years’ payback, so it’s nowhere near as cushy as, say, spreading out the borrowing over a 30-year period and then paying it off aggressively when you can, and just paying the minimum when times are lean. I tried that, once, when I wanted to grow faster than the house income could support… I promised myself never again, and just take things slow and conservatively.