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if your house is worth 200k and you owe 1M to the bank. your net worth (assuming you have nothing else) is then -800k.
The $160 can't be accessed until the house is sold (let's just assume that for now). it is still an asset.
but, if you're adamant about thinking about it in the flawed way you're thinking about it above, then use the same mentality about your debt to the bank, which is: You don't owe the bank 160k 'today'. you owe them 160k over 30 years, so you can't count it as liability today!
That's almost an argument I can buy.
I do understand that in actual accounting the house would be marked as a $200k asset in one column, and the debt $160k in the debit column. I'm just making a point. Account how you like-its the bank that owns your home if you have a mortgage. Cause the house to lose value somehow, and the amount owed to the bank does not go away. Burn it down and you still owe $160k. Have it go under, and you still owe $160k. You have a at best a highly illiquid variable asset. The bank has a steady asset in its loan to you. Synchronicity can claim "NET WORTH IS UNCHANGED BEFORE AND AFTER THE TRANSACTION." The reality is different. At a minimum $160k worth of risk has been taken on.
I do like your 2nd paragraph thought. But, in reality the amount you owe looking at it that way is about doubled due to interest.
I do understand that in actual accounting the house would be marked as a $200k asset in one column, and the debt $160k in the debit column. I'm just making a point. Account how you like-its the bank that owns your home if you have a mortgage. Cause the house to lose value somehow, and the amount owed to the bank does not go away. Burn it down and you still owe $160k. Have it go under, and you still owe $160k. You have a at best a highly illiquid variable asset. The bank has a steady asset in its loan to you. Synchronicity can claim "NET WORTH IS UNCHANGED BEFORE AND AFTER THE TRANSACTION." The reality is different. At a minimum $160k worth of risk has been taken on.
I do like your 2nd paragraph thought. But, in reality the amount you owe looking at it that way is about doubled due to interest.
I think you stating in the beginning the fact that you understand how it's 'actually done' would have helped deviate all of heat and unnecessary frustration on everyone's part here trying to explain. I think you should have said "i understand it's done this way...but...i think it shouldn't be because you can also look at it this other way..." and that may have generated more healthy debate about the 'concept' as opposed to trying to explain how net worth is actually calculated.
that said, i understand where you're coming from...however, in your example above, this is what would happen to your 'net worth': (keep in mind that "net worth" is an instant in time. it doesn't mean tomorrow's net worth or yesterdays, as those could and often are two different values).
You have a 200k house. owe 160k to the bank. today (this moment, assuming you are able to sell the house for 200k right this instant without 'any' costs or transaction time), your networth is 40k, as you can take the 200k you just got from selling the house, give 160k to the bank and be left with 40k.
Let's say your house burns down this instant! your networth will be NEGATIVE! (assume the land is worthless). you still owe 160k to the bank but have zero in assets. so your networth is -160k. BUT, assuming your have insurance, the insurance company will value the house at 200k, then give 160k to the bank and then 40k to you. (which leaves you at the 40k networth as above).
I do understand that in actual accounting the house would be marked as a $200k asset in one column, and the debt $160k in the debit column. I'm just making a point. Account how you like-its the bank that owns your home if you have a mortgage. Cause the house to lose value somehow, and the amount owed to the bank does not go away. Burn it down and you still owe $160k. Have it go under, and you still owe $160k. You have a at best a highly illiquid variable asset. The bank has a steady asset in its loan to you. Synchronicity can claim "NET WORTH IS UNCHANGED BEFORE AND AFTER THE TRANSACTION." The reality is different. At a minimum $160k worth of risk has been taken on.
I do like your 2nd paragraph thought. But, in reality the amount you owe looking at it that way is about doubled due to interest.
You're missing the point there. If you can't count the full value of an asset just because it can't be liquidated today, then you can't can't the full value of the liability because the liability isn't due today.
The bank doesn't OWN your house at all. They own a promissory note that is secured by your promise that if you don't adhere to the terms of the mortgage, that you will give over the house that you own.
The terms of the mortgage note include having insurance and making regular payment. Anything you may think they own about your house is really just the terms you agreed to in exchange for the money when you took out the mortgage.
The house is yours. As are your obligations under the mortgage. But a mortgage is not a house, and the fact that you've agreed to one does not mean you've given up ownership of your house unless you violate the terms of the mortgage.
ETA: For the underlined. Yes, $160k of debt has been taken on, and $40k has left your bank account as a down payment, but you are now the owner of a $200k house. This is no different from putting cash into a CD. You still have the same net worth.
Where do you get that from? When you sell your house you get two things (hopefully) equity to put into your next home, and money that is used to pay off your existing mortgage.
You specificay say on page 3 that if you buy a 200k house with 40k in cash and 160k in mortgage your networth goes from 40k to -160k. If you can sell the hood eat any time for 200k it's not possible to have a -160k networth.
You're missing the point there. If you can't count the full value of an asset just because it can't be liquidated today, then you can't can't the full value of the liability because the liability isn't due today.
The bank doesn't OWN your house at all. They own a promissory note that is secured by your promise that if you don't adhere to the terms of the mortgage, that you will give over the house that you own.
The terms of the mortgage note include having insurance and making regular payment. Anything you may think they own about your house is really just the terms you agreed to in exchange for the money when you took out the mortgage.
The house is yours. As are your obligations under the mortgage. But a mortgage is not a house, and the fact that you've agreed to one does not mean you've given up ownership of your house unless you violate the terms of the mortgage.
ETA: For the underlined. Yes, $160k of debt has been taken on, and $40k has left your bank account as a down payment, but you are now the owner of a $200k house. This is no different from putting cash into a CD. You still have the same net worth.
Keim - you are wrong, sorry man. Jeo's post here is just one example of refutation.
Your main problem comes from double-counting your liability. You claim the bank "owns" 4/5 of the house asset, yet claim you still then bear 100% of the liability. It doesn't go both ways. Either you "own" 100% of the house, and are responsible for 100% of the mortgage to the bank, or you own 20% of the house, the bank owns 80%, and therefore there is no real "liability" column. Your mortgage payment would just be like a rent check. (Of course, the latter is not how anyone thinks about this). But you can't mix and match.
As said previously, Assets != Equity.
And also to reiterate, the "house burning down" example is just like a big pile of cash you have burning up. Your assets have now severely dropped in value, and that affects your net worth.
So if you didn't have home insurance, then you went from 40K net worth (200K asset - 160K liability), down to -160K net worth (0 asset - 160K liability).
But, as also previously explained, this is why mortgage companies mandate HO insurance on your asset. They want to make sure their secured/collateralized loan STAYS that way through such events like natural disasters, etc.
If I own the property, how can the mortgage holder require me to do anything in regards to something I own? Oh, that's right, they can require it because they own part of the property. IN this case, they own 4/5th's of the property.
No they do not "OWN" the property! They have a SECURITY INTEREST in the property! Please, look it up. There's this thing called "google" that might help you. Another poster has already mentioned this very fact to you.
But you know what? it doesn't matter whether or not YOU agree with me. What matters is that, for the NUMBERS REFERENCED IN THE ARTICLE, which is what we're discussing, the US CENSUS BUREAU agrees with my definition (otherwise known as "the definition that everyone else who has any knowledge of such things uses) and DISAGREES with you.
So, you can say that both I AND the Census Bureau are wrong. Then you should write your own article with your own (adjusted) numbers (assuming there was enough data out there to allow you to adjust the numbers to fit your rather interesting definition of net worth).
Seriously, this is interesting. Everybody else posting on this thread has pointed out that you're mistaken, and you keep doubling down on it.
I'm under 35 and this seems typical for most of my friends...who never made any particularly bad choices but seem stuck in a rut.
My NW is ~130k so I'm an extreme outlier, but the 50th percentile having about 6k sounds dead on.
You are NOT extreme outlier. The 70th percentile is 128K. So, roughly 30 of people make more than you to not be an extreme outlier . You are doing great though!
Yeah, in hindsight I shouldve been clearer on that... Uproar has been entertaining.
Quote:
Originally Posted by Thinking-man
I think you stating in the beginning the fact that you understand how it's 'actually done' would have helped deviate all of heat and unnecessary frustration on everyone's part here trying to explain. I think you should have said "i understand it's done this way...but...i think it shouldn't be because you can also look at it this other way..." and that may have generated more healthy debate about the 'concept' as opposed to trying to explain how net worth is actually calculated.
that said, i understand where you're coming from...however, in your example above, this is what would happen to your 'net worth': (keep in mind that "net worth" is an instant in time. it doesn't mean tomorrow's net worth or yesterdays, as those could and often are two different values).
You have a 200k house. owe 160k to the bank. today (this moment, assuming you are able to sell the house for 200k right this instant without 'any' costs or transaction time), your networth is 40k, as you can take the 200k you just got from selling the house, give 160k to the bank and be left with 40k.
Let's say your house burns down this instant! your networth will be NEGATIVE! (assume the land is worthless). you still owe 160k to the bank but have zero in assets. so your networth is -160k. BUT, assuming your have insurance, the insurance company will value the house at 200k, then give 160k to the bank and then 40k to you. (which leaves you at the 40k networth as above).
You are NOT extreme outlier. The 70th percentile is 128K. So, roughly 30 of people make more than you to not be an extreme outlier . You are doing great though!
The 70th percentile is ~34k for those <35. You are looking at 35-44.
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. You are doing great though! 
