Money for nothing

There is a simple formula to prosperity that always works. If you have more wealth coming in than going out, you are prosperous. Now, as simple as that sounds, the complications arise when unlike Mama in “I remember Mama” we incur obligations that extend over time.
Now there is nothing wrong with this, if you are buying a car or a home and spread the payments over the expected period of use, you can ignore the fact that in the month of the purchase you appear extremely poor. So if you buy a $100,000 house and borrow the money to do so, as long as you have enough to cover the payment with interest and also pay your other bills you can still be prosperous. In fact the actual value of the house becomes immaterial as long as you continue to live in it.
However, in the last decade or so, we saw unprecedented appreciation in house values in many parts of this country and two things happened. Some people counted this appreciation as income and tapped the “equity”. This increased their debt and monthly payments in return for an immediate payout. Now, I’m not going to say this was wrong in general, but it wasn’t sustainable. Now some of those folks find that the various mortgages they hold exceed the underlying value of their house. They are in the parlance, “Underwater” and potentially better off walking away from their obligations then they would be paying them off.
The other thing that happened is that some people bet on the future appreciation of their house. If you could buy an asset now that was going to be worth 30-50% more in a few years, it would make sense to borrow money via any means possible. Now, we look at this behavior and say it was irresponsible. However, if you believe that values are going up and your broker and banker tell you the same thing, the behavior was extremely rational. It was almost as if you were getting something for nothing. Who wouldn’t sign up for that?