Isn't that only if the homeowner has no other equity or liabilities? Which is especially tricky when talking about people who, if we valued them like we value corporations, have equity in the form of the net present value of their future earnings.
The “book value” of equity according to accounting is just (assets - liabilities) and doesn’t include the company’s own future earnings. That’s what’s discussed in the article. Stock is also referred to as equity and its market value is whatever the market believes a company is worth and presumably does include future earnings according to whatever crystal ball it uses.
In this case we assume a house (valued at its purchase price) is the only asset. I get 4:1 though, assuming debt:equity.
It’s simple math, but definitions can be tricky and the article would be a whole lot clearer if he showed his work.
There are numerous real-life scenarios where a house is worth zero dollars.
This is not always true. (Trivially: your land is declared a superfund site. Less trivially: fire sale.)
> there are never situations where the value of the house is worth zero
I guess a decade and a half is all it takes to forget.
This varies jurisdiction to jurisdiction. And it isn't really germane to the question of quantifying one's leverage, which is a going-concern analysis.
But then don't we need to get into evaluating future earnings?
Yes, many flow leverage ratios look at this, e.g. interest to Ebit.
This is why mortgage lenders test your debt burden and interest cost against income.