Imagine staring down the road, seeing dozens of half-built houses.
I’m not talking about houses that are actively under construction. And I’m not talking about decrepit old houses that need to be torn down.
I’m talking about houses that were partially built … and then nothing. No active construction. No wheelbarrows or cement mixers or sweaty workers taking cigarette breaks. Just half-built house after half-built house.
That’s what I saw during my trip to Jamaica last week. Don’t get me wrong; I spotted plenty of complete houses, too, but partially-constructed homes were far from rare.
“What’s the story here?” I asked my taxi driver. He smiled.
“People don’t have money to build a whole house all at once,” he said. “So they build one room at a time. It might take five, ten, fifteen years for the house to be complete.”
Welcome to a world that’s not fueled by credit.
Now, before I proceed with the rest of the story, let me make a disclaimer here and say that I’m certainly not an expert on Jamaican culture. I’m quoting a random cab driver. Take his words with a grain of salt.
That said, I’ve traveled to many countries – and was born in a country – in which credit is much, much tougher to obtain than it is in the U.S. In those places, many 25-to-35-year-olds don’t have the privilege of being able to get a mortgage as soon as they can prove two years of work history, a decent credit score, and a low debt-to-income ratio. Life is much easier here in the U.S.
Of course, life in the U.S. is also fueled by debt.
“People in America don’t have the money to build a whole house, either,” I told the cab driver. “They only own a small fraction of that house, maybe one-tenth or one-fifth of it. The bank owns the rest.”
Here’s the interesting juxtaposition between the two circumstances: In both situations, people will still spend 10 or 15 years (or 30 years) paying for a house. But in one scenario, that payment gets made in advance. In another scenario, the payment is retroactive.
America is one of the rare countries in which people as young as 25 or 30 can buy their own home, thanks in large part to cheap debt flowing from banks. And when youngsters are buying houses, they’re also buying furniture, rugs, TVs, dishwashers. When credit flows freely, consumption doesn’t end.
That’s bad when you’re keeping up with the Joneses. But let’s not be pessimistic. It also has a bright side.
Thanks to this situation – because we can buy now, pay later — we have mobility, which is awesome. We’re not stuck in our hometown. We can chase education and career opportunities in different cities and states.
When we move to a new city, where we don’t know a soul (and can’t live with family), we can borrow money to buy a house, or we can rent a house from a landlord who almost certainly borrowed money in order to provide us with that rental.
Ah, economic mobility. #FueledByDebt
Unfortunately, some people get stuck in cubicles paying down that debt. And their stress levels might shoot – um – through the roof. (No pun intended).
In countries where ordinary people have limited access to credit, houses are much harder to acquire. And (speaking of mobility) so are cars. It’s tougher to buy a set of wheels when you can’t roll out of bed, cruise to the dealership, and sign-on-the-dotted-line for “no money down” and “low monthly payments.”
When the average consumer can’t swipe an AmEx, the scene changes – both for better and worse. People aren’t stressed about their MasterCard balance, but they also deal with inconveniences that Americans can’t imagine – like living with their parents until they’re 40 or enduring tropical heat without an air conditioner.
Resisting the Mentality
So is a less-credit-fueled society good or bad?
It’s a mixed blessing. On one hand, our debt-fueled spending creates jobs. After all, someone has to wear a tie and work at a car dealership. Someone needs to underwrite mortgages and pre-approve your next Visa offer and sell you a mattress with a payment plan.
Then again, many things create jobs. Like the Internet. And your own imagination.
Speaking of which, business loans – which are a completely different animal than consumer loans – can elevate people to a new level in life. You snag a lucrative contract, but the client will pay upon completion, so you need to borrow money to buy a forklift for the job. Or you find a rental property that features 18 percent returns. Or you’re an optometrist who wants to borrow money to buy a LASIK machine so you can open your own clinic.
Opportunities come alive when people can leverage their businesses in wise, judicious ways. (That’s why I said that if I had a million dollars, I’d go into debt.)
On a broad scale, debt can serve a fantastic social good.
But here’s the rub: it’s easy to fall into a mentality of “buy now, pay later.” That type of thinking can be corrosive to your net worth if you spend that money on the wrong things.
Which is why I appreciate visiting societies in which loans aren’t the default method of payment, places where no one assumes that you’ll borrow the cash to buy your next car or house. It reminds me that borrowing money should be the rare exception, not the norm.
And it reminds me to be grateful for those rare instances in which I’m able to use leverage to elevate my status in life – rather than dig myself into a hole.
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A beautiful article, Paula – thank you for sharing your insights!
We take things for granted in the U.S. It is one of the reasons that when immigrants come here, they do so much better (in the long run). They take education as an opportunity to move up. They take advantage of all the freedom and opportunities they did not have elsewhere. I know my parents did!
Great post! I love the thoughtful perspective you bring to things.
I am a big fan of Dave Ramsey and his “debt is evil” attitude. But at the same time, there are a lot of great advantages that easy credit in the US provides. I think it’s all in the way you approach the debt. Is it just for pure consumption (keeping up with the jones’) ? or for creation (making an investment, starting a business, making a home) ? Sometimes its not always clear but its a good thing to think about before getting into debt.
Mala
Thank you, Mala! I love Dave Ramsey, as well. (In fact, once when I was making a 14-hour drive from Atlanta to New York, I listened to almost nothing but Dave Ramsey podcasts the entire way.) I think he’s a brilliant man and that he provides wise council.
Obviously, I disagree with his “all debt is evil” attitude. My view on debt is more nuanced. Dave lost a lot of money in his twenties when he was over-leveraged, at a ratio of 3:1 (he “controlled” $4 million in assets — $1 million of which he owned outright, and $3 million of which he borrowed). He also carried short-term notes that were subject to being called in for immediate repayment (as opposed to fixed, 30-year notes that are legally protected against being called in for an immediate balloon payment). So he ended up getting burned by the type of debt, and the amount of debt, that he chose to carry.
yep, I’m from a caribbean country plus I did my undergraduate degree in jamaica so I can say that it’s not uncommon to see people build up their property over time. I must say, that is becoming less and less the norm in the caribbean though. as more and more people get higher education and more lucrative jobs, they prefer to move into a completed house rather than do the room, by room thing so out come the big loan applications. However, most people save for a number of years, then build their first house in their 30s or 40s. That being said, Jamaica has lots of flat areas but on most of the smaller islands, flat lands are limited so people often time have to build multilevel houses. You take a loan, do one level, live in that then over time when you “catch your hand” and save up some more, you complete the downstairs, rent it out, or your kids take that over.
We in the caribbean have a savings culture so with rent, food, bills and the all important student loan potentially consuming 75-100% of a single persons salary, it’s the norm to live at home until you get married. Helps you to save money to put towards your own house and your parents feel good that they can help you to get a good start. You also get to live a better quality life compared to being on your own, we usually live at home in relative peace with our folks or extended families. Our parents like the feeling of seemingly giving us a head start so on marriage, some people are even fortunate to be gifted with a piece of land that they then proceed to build on.
The Jones are beginning to creep up on us here though but like you said, credit is just not as easily available to us here. Mortgage loans go for 7-10% interest and usually require 10-20% down payment. Student loans are 8.5-12% interest, vehicle loans 8-12% so we literally cannot do everything at the same time. If credit was more easily available, I feel we would be in the same trouble a lot of americans are in due to over leveraging….sorry for the length but thought I could expound the 20 something west indian opinion.
Alana, thank you for the insight! I was hoping that someone from a Caribbean country would comment!
The situation you describe sounds very similar to Nepal — we have a savings culture, it’s the norm to live at home until you’re married (and sometimes even after you’re married), parents who can afford to do so will gift property to their children, and loans are both tough to obtain and expensive. The Jones are creeping up there, too, and Nepal is modernizing (it shocked me when I saw a DJ spinning at the Kathmandu Mall for a New Year’s show!) but credit is still harder to obtain, which limits people’s ability to over-stretch themselves.
As a fellow West Indian I can attest to what Alana described. In the Caribbean you usually live with your parents until you can save enough to buy land and build a house. It’s funny because in the Caribbean we feel like becoming advanced means becoming exactly like America, but not many understand the true pitfalls of easy credit.
In some parts of the country (at least 30 years ago), there were special tax codes that gave tax discounts to people who lived in basements (which were often built into the side of a hill first), and the rest of the house was built on top of the basement over the course of many years. The tax appraiser would give a discount to the house as long as it was JUST a basement, but once you added the proper first floor the rates would go up.
We know of a couple people that built this way in the sky-high interest rates of the early 80’s, borrowing as little as they needed to get just the basement done and livable. Then they moved in and grew the house as they could afford to.
Great comparison. I was initially thinking that the uncompletedd home was a casualty of the housing bubble, but the real reason is far more fascinating. The double edged sword of cheap debt is just too complicated to label as simply good or bad.
Wonderful article, I have similar views on debt and how the US can use it positively. I am currently super focused on achieve freedom from my debt……that is because it is bad debt in my eyes (student loans, and car loans). But I am itching to get into more debt to responsibly purchase rental properties as soon as possible.
Its that way in a lot of countries. If you don’t have the money you wait and piece by piece you get your home built. Great thing is that you own it when its done. Not oh you want this put it on credit pay 3x the amount by the time you pay the loan off. If we did that here most people would never own or they would learn to credit off of the credit crunch and actually save.
Thanks, i really like this article,hope i can build my house soon.
I remember this house on a very prominent corner in Dallas, TX. It took about 4 or 5 years to build. Reason being, this doctor was paying cash as it progressed. By the time it was done, it was paid for. If you have any readers from Dallas, they may remember this house – corner of Forest & Lemon. Very inspiring. Gorgeous home!
@Doug — Wow, that’s pretty cool! I probably would have just waited until I had the cash before I started … but, then again, perhaps costs just ran over-budget? At any rate, that must have been very interesting to watch.