Welcome to the Real World, You are Now in Debt

There has been a focus on the exploding problems of student debt, which are sinking a large population a critical point in their lives. But even if you are not under student loans, once you move out of your parent’s house you are effectively in debt– housing debt. The way this works is that if you buy a house it is usually for a mortgage, but if you rent, you are also paying off debt, and you dont even get the apartment once it is paid off. The landlord is either in debt or acts like it by setting the rent to cover the equivalent of the mortgage (because that is the norm in the competing rental market). Therefore, even if the apartment is 100 years old, it is not paid off, or at least the renters are paying as if it is not.

I believe that over 1/2 of someone’s rent is paying debt as opposed to paying for the upkeep of the house. Here is how this calculates out. In San Francisco, apartment buildings cost between $250-400 per square foot in reasonable neighborhoods. Rent in these apartments is $2000-$3000/month for 1000 square foot. At the current 5% mortgage rate (just the interest, not the principle) and a 1000 square foot apartment, the cost, just for interest on borrowed money is $1,350. Therefore in this circumstance, half of rent is for interest payments.   (Why the principle is also so high, is also because of debt, but that will be covered in another post.)

So paying renting is the equivalent of being debt, but without some of the advantages. For instance, after 30 years, you do not own that apartment. Also, if the value of the apartment goes up, you do not get to sell it for a profit, much to the contrary, your rent goes up to match those that are buying apartment buildings at the new higher rate. Now it is true that you can move out more readily, and if the price of the apartment building goes down, you are not as stuck, so there are some trade offs, but it is important, and in some ways
surprising how often we are really paying off debt when we think we are buying a good or service.

Even if the house is over 30 years old and would have paid off the original mortgage, the debt goes on. This is an effect of the commodification of objects– the ability to sell them to someone that is willing to go into debt based on the possibility of future earnings– means that house may never pass on the benefits of being paid off.

Some say that this is just the “will of the market”, but this “will” is just a made up human artifice that is now built into our institutions, government guarantees, advertising programs, and tax laws. It does not have to be this way. But undoing it will take being clever. More on how this might work later. But the key here is to see that debt is woven into more prices than just repaying loans.

Welcome to the real world, kid, you are now in debt.