The 30-Year Mortgage Is an Intrinsically Toxic Product (2019)(thediff.co)
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The 30-Year Mortgage Is an Intrinsically Toxic Product (2019)
https://www.thediff.co/p/the-30-year-mortgage-is-an-intrinsically-toxic-product-200c901746a
21 comments
It’s all bad. I’m not able to save up for a down payment, even if I wanted to buy a home (which I don’t, I want to keep moving around places and I’d rather not worry about maintenance, property taxes, etc.) I feel bad for those who do want to buy and are priced out.
They can always put a smaller down payment and just pay for the PMI so don’t feel too bad.
Many people who aren’t buying are really just trying to time the market, it’s not because they can’t put a down payment. No one wants to be caught bag holding a house that may be worth a lot less in a few years.
Many people who aren’t buying are really just trying to time the market, it’s not because they can’t put a down payment. No one wants to be caught bag holding a house that may be worth a lot less in a few years.
> They can always put a smaller down payment and just pay for the PMI so don’t feel too bad.
Which brings up another piece of "conventional" homebuying: the need for a 20% down payment. Many Americans are still taught this magic number, but the reality in many big cities is that you won't always be able to afford that amount.
Which brings up another piece of "conventional" homebuying: the need for a 20% down payment. Many Americans are still taught this magic number, but the reality in many big cities is that you won't always be able to afford that amount.
You can do 5% down.
5% down on $600,000 is still $30k, which is at least six months’ salary for many, many people. I know HN skews wealthy but the average median family income in California is $75k. Good luck!
You can keep moving the goal posts, but eventually you must face the moment of truth. If you’re not willing to work hard for a year and put the money down you do not get to own a home. There is no amount of downpayment people will ever be comfortable with, people simply want to have no downpayment at all and jump straight into mortgage payments.
If you're making $60K/year, I'm not sure that it's reasonable for you to have a $600/000 mortgage, completely apart from the down payment. You might be able to afford it with a 0% loan, but there aren't many of those...
I personally move around enough that transaction costs from home ownership would have been larger than the rent I actually paid.
What are the long term consequences of investing in real state? Sure, you will have some who can't afford to own, but for those who can, aren't they growing the economy?
Think about the externalities, the fed prints money whenever the economy is in trouble and needs help (ex: recession, pandemic), this money is to be well invested for growth (real state, stocks, etc.): this injection/debt engenders more jobs, construction, population and demand growth. As long as this last part is done right [more money supply = more production] the economy will be kept healthy.
The problem arises when the above equation does not balance out- ex: Argentina, Greece, Turkey, etc. (i.e. crypto arguments), when people and governments do not produce to justify that investment (aka corruption and stealing).
Money's purpose is to be used for growth, so unlike the popular view of "inflating fiat steals your money", I don't think people understand money's purpose in the 1st place.
Except for artificially supply restricted markets (ex: single family zoning in California [recently abolished] or money laundering on empty homes in Canada, UK & Australia), mortgages are not intrinsically toxic.
Think about the externalities, the fed prints money whenever the economy is in trouble and needs help (ex: recession, pandemic), this money is to be well invested for growth (real state, stocks, etc.): this injection/debt engenders more jobs, construction, population and demand growth. As long as this last part is done right [more money supply = more production] the economy will be kept healthy.
The problem arises when the above equation does not balance out- ex: Argentina, Greece, Turkey, etc. (i.e. crypto arguments), when people and governments do not produce to justify that investment (aka corruption and stealing).
Money's purpose is to be used for growth, so unlike the popular view of "inflating fiat steals your money", I don't think people understand money's purpose in the 1st place.
Except for artificially supply restricted markets (ex: single family zoning in California [recently abolished] or money laundering on empty homes in Canada, UK & Australia), mortgages are not intrinsically toxic.
*Edit: The problem arises when the above equation does not keep pace with growth- you can be in debt as long as you are also growing
The mortgage rate is locked in, but that doesn’t save you—if you have a high mortgage rate the rates could go down (but you’re locked in and can’t benefit unless you refinance), if you have a low mortgage rate then the principal is higher.
If rates go down, you're locked in unless you do this very obvious and fairly painless thing.
“Obvious and painless” but not inexpensive. If it were trivial to refinance, you’d effectively have a variable rate mortgage where the rates could only go down, not up.
It is inexpensive in the grand scheme of things, I recently refinanced and it cost around $2000, I’ll make that back in less than one year. If the cost of refinancing isn’t made back in a couple years maybe don’t refinance yet…
That is more or less how I view my mortgage. I bought in 2007 at 6.5%, refinanced in 2011 to 4.25%, then again a few years later to 3.625%, and plan to refinance again soon if I can lock in a 2.75%, no-points sometime soon. There are no points, no closing costs refis available. The biggest hassle in refinancing is making copies/uploading 2 years of tax returns and whatever other paperwork the underwriters want.
If you deal with a small local bank, you may be able to get a portfolio mortgage that they hold, with some unique benefits. I recently did this, they matched the rate my existing lender (big international bank) gave me, plus they offer a float down on the rate once per 12 months for a fixed fee of $975. No refinance necessary.
That’s exactly what it is, which is why the rate is higher than an actual variable rate mortgage (where rates can go up too).
From the perspective of my European 100 year mortgage, 30 year fixed seems it cuts down the prices in absolute terms which offloads the risk from the buyer a bit. I wish there were laws limiting the length of mortgages to say 10 years. That would mean I had bought my house at 1/10th the price and thus at 1/10th the risk.
But the question is of course is a mortgage seen as someone "paying off" a house, or simply a rent to the bank? I never intended to purchase/repay my house. The 100 year home loan is how I rent and the bank is my landlord. I take a lot of the risk for changes in the market, but also obviously the reward too (unlike a normal rental setup).
I do pay it back (1/100 per year) but obviously my horizon for living in the home isn't 100 years. It's both in mine and my banks interest that my mortgage is kept at some level which is less than "one bad dip below market value", or say 2/3 or 12 of current market value. Once there, I'd rather invest the money than pay back more on the mortgage. Especially if interest rates are (a deductible) 1.5% and low risk investment yields several times that!
But the question is of course is a mortgage seen as someone "paying off" a house, or simply a rent to the bank? I never intended to purchase/repay my house. The 100 year home loan is how I rent and the bank is my landlord. I take a lot of the risk for changes in the market, but also obviously the reward too (unlike a normal rental setup).
I do pay it back (1/100 per year) but obviously my horizon for living in the home isn't 100 years. It's both in mine and my banks interest that my mortgage is kept at some level which is less than "one bad dip below market value", or say 2/3 or 12 of current market value. Once there, I'd rather invest the money than pay back more on the mortgage. Especially if interest rates are (a deductible) 1.5% and low risk investment yields several times that!
You can get an interest only mortgage in the US. Removes the illusion of paying it off. Functional, it would be very very close to a 100 year mortgage (few less dollars per month that goes to principle)..
Remember though, for a big part of the US, paying off your mortgage is the most important / biggest form of retirement savings. Many people make it their goal to pay off their mortgage before they retire, even if their 401k is dry. With social security and modest lifestyle, it's not a terrible decision. You can even reverse mortgage if the well runs dry a few years early..
Remember though, for a big part of the US, paying off your mortgage is the most important / biggest form of retirement savings. Many people make it their goal to pay off their mortgage before they retire, even if their 401k is dry. With social security and modest lifestyle, it's not a terrible decision. You can even reverse mortgage if the well runs dry a few years early..
Yes, they used to be interest only here before, the 1% (or 2% for the first part) was added in response to risks. So basically the 1% is just that, retirement savings.
Because at the end of the day it doesn't really matter whether it's 1/30 of a 30yr mortgage or 1/100 of a 100yr mortgage, that amount will be exactly what the buyer can afford. So after 30 years I'll have a home with around 1/2 a mortgage remaining. And saving a massive slump in prices, that will be a big part of my retirement savings. Having a completely paid off 30yr mortgage would be even better of course, but not hugely so. The amount left as "savings" is still the same. The longer mortgage just holds a larger risk/reward of passive income vs loss.
Because at the end of the day it doesn't really matter whether it's 1/30 of a 30yr mortgage or 1/100 of a 100yr mortgage, that amount will be exactly what the buyer can afford. So after 30 years I'll have a home with around 1/2 a mortgage remaining. And saving a massive slump in prices, that will be a big part of my retirement savings. Having a completely paid off 30yr mortgage would be even better of course, but not hugely so. The amount left as "savings" is still the same. The longer mortgage just holds a larger risk/reward of passive income vs loss.
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I normally don't talk to people much about real estate, house prices, mortgages etc., but the local real estate market has heated up a little so I have been talking about these things with people more.
One thing I did not expect is how many banks have waived the 20% down payment rule. If you pay some mortgage insurance you can buy a home with less than 20%. I have talked with people who managed to ante up 20%, and some who bought without 20% down.
In light of the not-so-distant 2008 subprime mortgage bailout, some of what is happening surprised me a little. Obviously, that this is happening would have the tendency to inflate real estate prices.
One thing I did not expect is how many banks have waived the 20% down payment rule. If you pay some mortgage insurance you can buy a home with less than 20%. I have talked with people who managed to ante up 20%, and some who bought without 20% down.
In light of the not-so-distant 2008 subprime mortgage bailout, some of what is happening surprised me a little. Obviously, that this is happening would have the tendency to inflate real estate prices.
Most young people don't earn even close to enough to save 20% of the cost of a house. Without those people (first time buyers) entering the market the entire market grinds to a halt as there's no one to buy on one end of a chain. The bank's mortgage businesses would collapse. They had to start offering alternatives to down payments.
I'm in a bizarre place financially. I'm single, in the Bay Area, and work for a FAANG. I have enough saved for 40+% down for a lot of decent things, so I'm limited by my salary, not my down payment. It's extra weird because RSUs don't necessarily count towards salary for mortgage purposes, but they're (for now) a significant chunk of my net pay.
I'm also a little worried about putting a lot down because prices might go down when interest rates go up.
I realize this isn't normal. Most people are somewhere cheaper, lots are married, and most have nowhere near as much cash.
I'm also a little worried about putting a lot down because prices might go down when interest rates go up.
I realize this isn't normal. Most people are somewhere cheaper, lots are married, and most have nowhere near as much cash.
RSU's absolutely do count for income for mortgage purposes. (Source: I've bought a house recently and my RSU's were accepted as part of my income). It's different if you work at a startup, where the stocks are not yet publicly traded, but if you are working at FAANG it is publicly traded, then the stock is quite liquid, so banks consider those RSU's to be as good as dollars.
You just need a document from your employer demonstrating to the bank what they are intending to pay you per year in total compensation, including both salary and RSU stock. Also get some documents from your stock broker showing how many RSU's you have vested so far versus ones that are scheduled to vest over the next X years.
For a bonus: rather than liquidating all your vested RSU's for the downpayment, hold onto a good number of RSU's in your brokerage account as these can be used to show you are holding assets, which can help you get a lower mortgage rate as well. Banks love to see that you have assets you are holding onto and can liquidate just in case you do need cash. Their ideal customer is someone who can technically buy a house in cash, but is only applying for the mortgage because the mortgage rates are currently lower than the stock return rates.
Chances are if you work at FAANG and have RSU's that's actually considered a very safe loan that you are basically guaranteed to be approved for at a very nice low mortgage rate. You'll be able to get approved by multiple banks, and then get them to compete with each other to lower their rates by fractions of a percent to try to win your mortgage agreement. Mortgage brokers are your friends here, pay one to do the hard work of contacting the banks on your behalf and make sure your documents look good and then the banks will be falling over themselves to give you a loan.
You just need a document from your employer demonstrating to the bank what they are intending to pay you per year in total compensation, including both salary and RSU stock. Also get some documents from your stock broker showing how many RSU's you have vested so far versus ones that are scheduled to vest over the next X years.
For a bonus: rather than liquidating all your vested RSU's for the downpayment, hold onto a good number of RSU's in your brokerage account as these can be used to show you are holding assets, which can help you get a lower mortgage rate as well. Banks love to see that you have assets you are holding onto and can liquidate just in case you do need cash. Their ideal customer is someone who can technically buy a house in cash, but is only applying for the mortgage because the mortgage rates are currently lower than the stock return rates.
Chances are if you work at FAANG and have RSU's that's actually considered a very safe loan that you are basically guaranteed to be approved for at a very nice low mortgage rate. You'll be able to get approved by multiple banks, and then get them to compete with each other to lower their rates by fractions of a percent to try to win your mortgage agreement. Mortgage brokers are your friends here, pay one to do the hard work of contacting the banks on your behalf and make sure your documents look good and then the banks will be falling over themselves to give you a loan.
A bit OT, but this is my current dilemma. My entire career has been with startups so I effectively value any equity at $0 (none have made an exit). That means all my assets are cash/stock, since I've rented my whole life.
Makes me nervous that I won't qualify for a low mortgage rate right as the Fed is likely to start raising interest rates again (further chilling my enthusiasm to buy).
Makes me nervous that I won't qualify for a low mortgage rate right as the Fed is likely to start raising interest rates again (further chilling my enthusiasm to buy).
> hold onto a good number of RSU's in your brokerage account as these can be used to show you are holding assets
Would they really care if the asset is cash or stocks?
> very nice low mortgage rate
True, and my credit score is higher than 760, so banks love me.
Would they really care if the asset is cash or stocks?
> very nice low mortgage rate
True, and my credit score is higher than 760, so banks love me.
> Would they really care if the asset is cash or stocks?
You would think not, but I suspect that the process, or the people involved in the process, see a good amount of assets in stocks as an indicator of a more financially savvy applicant, which theoretically translates to a safer mortgage. Having a large amount of cash is ironically a bit suspicious looking as well. It is normal for banks to ask for many months of bank statements to verify that the cash is actually yours, and you aren't just temporarily holding onto it for someone else, or got a big transfer from parents / friends that you need to pay back. With stocks it is easy to see that you have had this asset for a while, so they can trust that it is actually yours.
You would think not, but I suspect that the process, or the people involved in the process, see a good amount of assets in stocks as an indicator of a more financially savvy applicant, which theoretically translates to a safer mortgage. Having a large amount of cash is ironically a bit suspicious looking as well. It is normal for banks to ask for many months of bank statements to verify that the cash is actually yours, and you aren't just temporarily holding onto it for someone else, or got a big transfer from parents / friends that you need to pay back. With stocks it is easy to see that you have had this asset for a while, so they can trust that it is actually yours.
> I'm also a little worried about putting a lot down because prices might go down when interest rates go up.
Get married, move to a cheaper place - remote work is all the rage now after all - and use that cash to buy some real estate without the need for any mortgage (in this order or the other way around, your choice). You'll gain the financial security of having your own home, the social security of having a family and the freedom to explore whatever befits you. Who cares what interest rates or housing prices do, you're not affected by either.
Source: I more or less did this and have never looked back with regret.
Get married, move to a cheaper place - remote work is all the rage now after all - and use that cash to buy some real estate without the need for any mortgage (in this order or the other way around, your choice). You'll gain the financial security of having your own home, the social security of having a family and the freedom to explore whatever befits you. Who cares what interest rates or housing prices do, you're not affected by either.
Source: I more or less did this and have never looked back with regret.
> It's extra weird because RSUs don't necessarily count towards salary for mortgage purposes, but they're (for now) a significant chunk of my net pay.
Are you sure this is true? In my (admittedly limited) experience, the way it works is that the bank asks for your annual income and you have to provide proof of that, which you can do by providing a statement from the brokerage account your company vests your RSUs to. RSUs issued from your (presumably publicly traded) company are liquid, so you can pretty easily claim them as part of your annual income and get a mortgage against that income.
Are you sure this is true? In my (admittedly limited) experience, the way it works is that the bank asks for your annual income and you have to provide proof of that, which you can do by providing a statement from the brokerage account your company vests your RSUs to. RSUs issued from your (presumably publicly traded) company are liquid, so you can pretty easily claim them as part of your annual income and get a mortgage against that income.
It did with one lender I talked to (Rocket Mortgage). I'll check with another (probably First Republic).
This depends a lot on the bank, most of them are glad to use stock as part of the income calculation so long as you have a history of vesting a certain amount over time. It works the same way as bonuses or commissions, if you want variable income to count toward your DTI you need to demonstrate you get it regularly.
I'm trying to understand your comment about not putting a large down payment in case prices go down.
Whether you buy or not is really the only thing that matters if you think the price will go down.
Now the thing to consider, is how much to put down vs how much of your down payment you should invest. With rates so low, it seems better to invest the down payment in the stock market and putting the minimum in the house.
Now the thing to consider, is how much to put down vs how much of your down payment you should invest. With rates so low, it seems better to invest the down payment in the stock market and putting the minimum in the house.
The amount down changes if I'm playing with my money or they bank's. There's a cutoff where you can default on the home, wreck your credit, but if you have enough in the bank to buy a replacement, come out ahead.
> With rates so low, it seems better to invest the down payment in the stock market and putting the minimum in the house.
I'd agree that it'd be better to put the minimum possible down, but remember that I'm limited by my salary, not my down payment, so I'm expecting 40% down so I can afford something nicer. I also think that stocks have done will because there's no alternative, and people buy the most expensive home they can afford the mortgage for, so if interest rates go up, both stocks and real estate will go down (or up less quickly).
> With rates so low, it seems better to invest the down payment in the stock market and putting the minimum in the house.
I'd agree that it'd be better to put the minimum possible down, but remember that I'm limited by my salary, not my down payment, so I'm expecting 40% down so I can afford something nicer. I also think that stocks have done will because there's no alternative, and people buy the most expensive home they can afford the mortgage for, so if interest rates go up, both stocks and real estate will go down (or up less quickly).
How can it be that they earn enough to make the monthly payments, then?
They're already paying more than that much in rent. They just can't put together that and 20% of the full (greatly inflated) valuation at the same time.
Where? In the expensive coastal markets the price to rent ratio is enormous; the mortgage is much higher than the rent on the same home.
> the mortgage is much higher than the rent on the same home
That would really surprise me. Everyone I know talks about how much cheaper it would be to buy if only they could afford the deposit.
Most of the time the mortgage is lower than the rent for the obvious reason that when you rent you're both paying the landlord's mortgage, plus their profit.
That would really surprise me. Everyone I know talks about how much cheaper it would be to buy if only they could afford the deposit.
Most of the time the mortgage is lower than the rent for the obvious reason that when you rent you're both paying the landlord's mortgage, plus their profit.
Many landlords do not have a mortgage. Or if they do, the cost basis is much lower than if you bought the same place today. Also, there are major costs to owning home beyond the mortgage. To use myself as an example, only ~60% of my ownership costs are the actual mortgage.
Whether or not the fully burdened mortgage is less than the rent depends on the region but it is not uncommon for the costs of owning to be higher than the costs of renting, and this still makes sense for the landlord because of differences in cost basis.
Whether or not the fully burdened mortgage is less than the rent depends on the region but it is not uncommon for the costs of owning to be higher than the costs of renting, and this still makes sense for the landlord because of differences in cost basis.
A long-tenured landlord made some money in his role as a speculator, and currently has it invested as equity in the property. Which, yes, gives him a lower mortgage payment than you would face. This $X invested in the property is yielding him $Y in marginal cash flow per month. You can do that too, assuming you have $X, by paying extra towards your own mortgage. But do you want to? Depends on the value of $X and $Y; you may be better off buying index funds.
> when you rent you're both paying the landlord's mortgage, plus their profit.
True, of course. But you are also paying the landlord's property taxes and maintenance costs and (sometimes) utilities and....
A pet peeve of mine is when people compare mortgage payments to rent payments as if they are a equivalent. There is a lot of additional overhead in homeownership beyond the mortgage payment.
Though maybe it's a sore point for me because my furnace died this morning and it's -40 outside so guess who gets to drop an unplanned $6k this week?
True, of course. But you are also paying the landlord's property taxes and maintenance costs and (sometimes) utilities and....
A pet peeve of mine is when people compare mortgage payments to rent payments as if they are a equivalent. There is a lot of additional overhead in homeownership beyond the mortgage payment.
Though maybe it's a sore point for me because my furnace died this morning and it's -40 outside so guess who gets to drop an unplanned $6k this week?
> There is a lot of additional overhead in homeownership beyond the mortgage payment.
Which you pay via your rent as well, as your landlord is also paying those overheads.
When you rent you're paying everything you pay when you own... plus profit for someone else.
Which you pay via your rent as well, as your landlord is also paying those overheads.
When you rent you're paying everything you pay when you own... plus profit for someone else.
> plus profit for someone else.
Well, possible profit. There is risk involved. Underwater mortgages are totally a thing.
More recently, a fair number of landlords are in trouble right now due to the COVID eviction pause. Their tenants stopped paying, but their own principal, interest, and insurance payments kept going clickety-clickety-click. Some of them are even walking away from the properties.
It's also important for everyone to keep in mind that not everywhere is the Bay Area, or even California. Judging nationwide housing conditions by the conditions in those regions is likely a mistake.
Well, possible profit. There is risk involved. Underwater mortgages are totally a thing.
More recently, a fair number of landlords are in trouble right now due to the COVID eviction pause. Their tenants stopped paying, but their own principal, interest, and insurance payments kept going clickety-clickety-click. Some of them are even walking away from the properties.
It's also important for everyone to keep in mind that not everywhere is the Bay Area, or even California. Judging nationwide housing conditions by the conditions in those regions is likely a mistake.
Yes, that's what I just said.
The problem is that there is a tendency for people to compare the rent payment directly to only the mortgage payment.
The problem is that there is a tendency for people to compare the rent payment directly to only the mortgage payment.
It is surprising, and counterintuitive. In the "hot," high price to rent ratio cities (NYC, BOS, DC, LA, SF, SEA, etc) landlords don't make money in their capacity as landlords, but as speculators.
Rent is just a little bit of gravy to partly offset the cost of owning those appreciating assets. It's not the point.
Rent is just a little bit of gravy to partly offset the cost of owning those appreciating assets. It's not the point.
That makes no sense at all. Nobody would buy in that scenario and for the landlord the return is negative, so they wouldn't buy either.
Property appreciation can make renting below the mortgage payment financially attractive. A house that's appreciating 5% per year is covering for a lot of negative cash flow.
A lot of the UK
Well, they're probably paying rent before buying. And in many places in the country a monthly mortgage plus tax and insurance payment comes out well under rent.
Historically low interest rates. Also, the average percentage of household income allocated towards housing has been steadily increasing.
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Oh they earn enough to make monthly payments. They just happen to be paying someone else's mortgage, rather than their own.
This often ignores the cost of council rates, insurance, loan interest, etc. You need to be able to afford more than just rent to own. But if the bank approves you, it’s likely right because they don’t want to give loans that people can’t afford.
No, it's pretty common that people end up paying more in rent than they would for a mortgage. You could maybe argue that the job security is what is priced into this, but it happens to working professionals too.
I can see this being true in some markets, but the places where we talk about house prices going crazy, they are doing so not just in absolute terms but in proportion to rents.
No, with out those buyers the market could not support the MASSIVE increase in prices many multiples of inflation in some markets, they "HAD" to start offering alternatives or sellers would have to seek only reasonable profits on the sell instead of exorbitant profits... the horror
People treat their house as a retirement fund, or just an investment. They won't sell at a loss. If prices go down they just won't sell, which would also make it impossible for bank's to sell mortgages to people buying. Buyers can't buy if there are no sellers. People have to keep buying houses forever or the banking system will fail.
>>They won't sell at a loss. If prices go down they just won't sell,
This is absolutely false. Many people have sold at a lost over the years for many reason including job relocation, family issues, bankruptcy, etc et etc
That said Pricing going down != loss, for example I bought my current home 5 years ago, I bought it below market value, and after 5 years of value increases prices would have to drop more than 20% for me to sell it for less than I paid for it, and much more to "take a loss" if you calculate profit / loss properly factoring the value of shelter provided (which no one does)
>>People treat their house as a retirement fund, or just an investment.
That is a problem society has yes...
This is absolutely false. Many people have sold at a lost over the years for many reason including job relocation, family issues, bankruptcy, etc et etc
That said Pricing going down != loss, for example I bought my current home 5 years ago, I bought it below market value, and after 5 years of value increases prices would have to drop more than 20% for me to sell it for less than I paid for it, and much more to "take a loss" if you calculate profit / loss properly factoring the value of shelter provided (which no one does)
>>People treat their house as a retirement fund, or just an investment.
That is a problem society has yes...
I sold my previous house at a substantial loss.
The moral preaching is out of place. When you own a home and are selling it, you go for the highest bidder. The idea that anybody at all would give a politically motivated discount is naive.
The more important point is that in a supply-constrained situation, there isn't really going to be a "buy the dip" moment. Most home owners that are under water are under no pressure to sell, yet buyers are on the clock.
The more important point is that in a supply-constrained situation, there isn't really going to be a "buy the dip" moment. Most home owners that are under water are under no pressure to sell, yet buyers are on the clock.
it is not really moral preaching, nor it is a statement on the buyers. I it is a condemnation of the system we have created (largely due to government regulations)
I dont blame a seller for trying to sell at maximum price they can get, I am blaming the system we have created to puts monthly payments, and long term debt as the focus of purchase instead of the cost of the thing being sold.
Cars are the same way, we know how Pickup Trucks that cost $100,000 why because financing as allowed them to cost that because the banks will loan now almost 10 years to finance a new truck
College is the same way. Debt financing allows the prices to raise at rate far removed from inflation, with out that sellers would need to find way to cut costs and offer their goods are more affordable prices.
My Problem is with our current system of Life Long Debt.
I dont blame a seller for trying to sell at maximum price they can get, I am blaming the system we have created to puts monthly payments, and long term debt as the focus of purchase instead of the cost of the thing being sold.
Cars are the same way, we know how Pickup Trucks that cost $100,000 why because financing as allowed them to cost that because the banks will loan now almost 10 years to finance a new truck
College is the same way. Debt financing allows the prices to raise at rate far removed from inflation, with out that sellers would need to find way to cut costs and offer their goods are more affordable prices.
My Problem is with our current system of Life Long Debt.
> The moral preaching is out of place. When you own a home and are selling it, you go for the highest bidder.
You may not recognize it as such, but the idea that you always sell to the highest bidder is an expression of a very specific sort of "morality", one that excludes a more wholistic conception of what property ownership means for society as a whole, as well as the individuals who make it up.
I understand that "the market sets the price" is a widely accepted dogma after 30-40 years of neoliberal messaging in every part of the US, UK and significant chunks of the rest of the world, but it's not actually natural law (to the extent that more or less nothign is natural law).
You may not recognize it as such, but the idea that you always sell to the highest bidder is an expression of a very specific sort of "morality", one that excludes a more wholistic conception of what property ownership means for society as a whole, as well as the individuals who make it up.
I understand that "the market sets the price" is a widely accepted dogma after 30-40 years of neoliberal messaging in every part of the US, UK and significant chunks of the rest of the world, but it's not actually natural law (to the extent that more or less nothign is natural law).
I totally get what you're saying, but in particular I protest against moral hypocrisy.
The very people complaining about being locked out of the housing market, being a victim of market conditions, would instantly forget about any and all morality as soon as they do secure a house. They'd absolutely not sell their house at a discount.
When they preach "accessible housing", they mean accessible to them. When their houses appreciate in price just for the sake of owning it, I would know of nobody saying: I didn't deserve this, I'm going to wire this money to charity or back to the government.
There is no morality in markets. Whilst as owner you may benefit, in times that you do not (economic crisis, expensive repairs, personal problems like divorce or disability)...absolutely nobody comes to your rescue.
Morals and markets do not go together.
The very people complaining about being locked out of the housing market, being a victim of market conditions, would instantly forget about any and all morality as soon as they do secure a house. They'd absolutely not sell their house at a discount.
When they preach "accessible housing", they mean accessible to them. When their houses appreciate in price just for the sake of owning it, I would know of nobody saying: I didn't deserve this, I'm going to wire this money to charity or back to the government.
There is no morality in markets. Whilst as owner you may benefit, in times that you do not (economic crisis, expensive repairs, personal problems like divorce or disability)...absolutely nobody comes to your rescue.
Morals and markets do not go together.
I don’t think this is quite fair. Just because someone recognizes a major systemic problem such as spiraling housing prices doesn’t obligate them to unilaterally decline their personal gains on a moral basis, especially because that will achieve nothing in terms of rectifying the situation.
Now if they oppose broader reform that could actually have positive effects, that’s a more appropriate and nuanced question.
Now if they oppose broader reform that could actually have positive effects, that’s a more appropriate and nuanced question.
Sure, the hypocrisy is a problem.
I remember in Seattle in the mid-90s just as the housing market there was starting to take off hearing a radio talk show where someone was complaining about Californians coming to WA and "ruining things" by bidding up housing costs. The host pointed out that it takes two to tango, and that the sellers were just as implicated in the process as the buyers. The caller got very flustered and then said "well, yeah, but it would be un-American to accept anything except the highest price".
Sigh.
I remember in Seattle in the mid-90s just as the housing market there was starting to take off hearing a radio talk show where someone was complaining about Californians coming to WA and "ruining things" by bidding up housing costs. The host pointed out that it takes two to tango, and that the sellers were just as implicated in the process as the buyers. The caller got very flustered and then said "well, yeah, but it would be un-American to accept anything except the highest price".
Sigh.
Since the moment humans traded commercially, getting the highest price for anything has been the norm. So I wouldn't call it an American thing and also not a neoliberal thing. It's basic commerce.
> getting the highest price for anything has been the norm
This is not true. For example, the Romans used to use a cost-plus pricing scheme, and were apparently alarmed/surprised by the negotiations that they saw in Arab markets.
This is not true. For example, the Romans used to use a cost-plus pricing scheme, and were apparently alarmed/surprised by the negotiations that they saw in Arab markets.
That I did not know. I don't think it entirely overrules my point, but it's a good counter nevertheless.
For someone selling what is likely by far the most expensive thing they own, they're pretty likely to take the highest price offer (or a near highest price iff that under-bidder is significantly more certain to close [waiving contingencies, etc.])
>the idea that you always sell to the highest bidder is an expression of a very specific sort of "morality"
If you accept a low bid, you open yourself up to claims of discrimination against one or more protected classes.
If you accept a low bid, you open yourself up to claims of discrimination against one or more protected classes.
> the entire market grinds to a halt
By which you actually mean "prices come down to earth," which is a good thing, just one that many powerful interests don't want to happen because they have bet against it.
By which you actually mean "prices come down to earth," which is a good thing, just one that many powerful interests don't want to happen because they have bet against it.
No the entry-level end would just switch to a rental market. Those already in the market can afford to buy up starter homes as rental properties. Those not yet on the ladder would get locked out as eternal renters.
The solution, as with the original problem is to build more housing.
The solution, as with the original problem is to build more housing.
What it seems like is house pricing adjusts to be affordable for a similar number of people regardless of what you do. Give people bigger, longer term loans and you don’t give more people access, you just make prices higher.
What you need to do is remove the dead weight from the market: i.e. do things to reduce investors and mortgage writers siphoning money out of the economy. What this means is smaller, shorter term loans and taxes on commercial real estate lending and leased land and housing.
What you need to do is remove the dead weight from the market: i.e. do things to reduce investors and mortgage writers siphoning money out of the economy. What this means is smaller, shorter term loans and taxes on commercial real estate lending and leased land and housing.
In the UK, one part of the (insane) government response to this stagnation of new buyers entering the market has been to start adding absurd schemes such as partial-buy-plus-rent-to-buy, in which the "buyers" only own/mortgage part of the property, pay rent on the other part, and accrue some level (not necessarily very much) of credit to reduce the cost of buying the rented part should they ever decide to do this. It reduces the down payment cost substantially, but doesn't change the monthly payments much at all.
It's also totally freakin' nuts.
It's also totally freakin' nuts.
The ability to pass less than 20% with PMI has been a thing for a long time... It was around before the 2008 crash and never went away afterwards. The bar to qualify for a mortgage went up, and has come back down some (though not all the way to pre-2008 levels), but PMI didn't really change AFAIK.
I had a mortgage that had PMI for a time in the late 90s. (I could have afforded 20% but then I couldn't have afforded a bunch of improvements which the fixer-upper really needed.)
The problem with a percentage-based down payment is that wages do not keep up with the housing market.
In my country, the price of real estate appreciated by 20% in a single year. Wages are likely negative given the high inflation. On a longer time period of 25 years, houses have tripled in price, yet wages have not.
So whilst the percentage stays the same, the absolute value of the down payment grows out of control and is no longer affordable.
In my country, the price of real estate appreciated by 20% in a single year. Wages are likely negative given the high inflation. On a longer time period of 25 years, houses have tripled in price, yet wages have not.
So whilst the percentage stays the same, the absolute value of the down payment grows out of control and is no longer affordable.
Eh, we purchased a home (a fixer-upper) at 10% down and put that cash towards improving it. We had to pay a modest amount of PMI (about $85/month). Refinanced it 3 years later; new assessed value put us over 20% equity and we no longer had to carry it.
I assume they let us do this because we purchased below our “max budget” - so even if we took a pay cut, paying the mortgage would still be feasible.
2 of many factors that contributed to the lending crisis in 2008 aren’t necessarily a factor: the first being extremely relaxed lending standards (as in people with no real verifiable income getting loans) and the second being the proliferation of ARMs. My understanding is standards tightened during the pandemic but I could be wrong.
I assume they let us do this because we purchased below our “max budget” - so even if we took a pay cut, paying the mortgage would still be feasible.
2 of many factors that contributed to the lending crisis in 2008 aren’t necessarily a factor: the first being extremely relaxed lending standards (as in people with no real verifiable income getting loans) and the second being the proliferation of ARMs. My understanding is standards tightened during the pandemic but I could be wrong.
When we bought, we had enough for 15% down but could not reach 20%. Since we had to get mortgage insurance anyway, we were advised to just put 5% down and hold back the rest to cover moving expenses and setup for a new house. 5 years later we had paid off enough to refinance at a lower rate, shorter term, and without the PMI.
There have been mortgage products with less than 20% down for a long time now. I bought a house in 2016 for 3.5% down, I had at least 3 separate lenders give me a loan estimate with those terms.
I just bought with 5% down, though I have good credit and income.
A lot of these "analyses" ignore one simple fact: you need to live somewhere.
The way I describe this is that you constantly have a short position on the local real estate market. If rents go up, you lose. If house prices go up, you lose. If either goes down, you win. That's a short position.
So I view buying real estate as essentially canceling out your short position. Think about it: if the local market moves, it largely doesn't affect you. You can argue if you're underwater, it's bad. It's not good but your actual liability tends to be limited, particularly in no recourse states. For those unfamiliar, no recourse states give the lender the option to foreclose on the property if it's in default or to go after you for the debt. They can't do both.
The author claims mortgages trap the poor in bad investments. The counterargument to that is you give stability to those who are most likely to be priced out by rent hikes and forced to move. Efforts to avoid that (eg rent control) don't really solve anything and just create the same problems that incumbent home ownership does: first come, first served.
The author bemoans the lack of labour market flexibility with higher home ownership. This is true but is it bad? You have to remember he's talking about the 1930s when people were destitute and were forced to chase work. Should this really be a policy goal?
The lack of the 30 year mortgage would likely disproportionately affect poor people.
Real estate does need reform. I think we need to stop allowing funds and the super-rich to park money in real estate. Cities should be for those who live in the city, not Russian oligarchs who are anonymously "investing" via a REIT. We also need to stop subsidizing ultra-luxury building as happens in NYC (eg 421a abatements).
But the 30 year mortgage? This feels like an attack on the most economically vulnerable to me.
EDIT: corrected "negative short" to "short".
The way I describe this is that you constantly have a short position on the local real estate market. If rents go up, you lose. If house prices go up, you lose. If either goes down, you win. That's a short position.
So I view buying real estate as essentially canceling out your short position. Think about it: if the local market moves, it largely doesn't affect you. You can argue if you're underwater, it's bad. It's not good but your actual liability tends to be limited, particularly in no recourse states. For those unfamiliar, no recourse states give the lender the option to foreclose on the property if it's in default or to go after you for the debt. They can't do both.
The author claims mortgages trap the poor in bad investments. The counterargument to that is you give stability to those who are most likely to be priced out by rent hikes and forced to move. Efforts to avoid that (eg rent control) don't really solve anything and just create the same problems that incumbent home ownership does: first come, first served.
The author bemoans the lack of labour market flexibility with higher home ownership. This is true but is it bad? You have to remember he's talking about the 1930s when people were destitute and were forced to chase work. Should this really be a policy goal?
The lack of the 30 year mortgage would likely disproportionately affect poor people.
Real estate does need reform. I think we need to stop allowing funds and the super-rich to park money in real estate. Cities should be for those who live in the city, not Russian oligarchs who are anonymously "investing" via a REIT. We also need to stop subsidizing ultra-luxury building as happens in NYC (eg 421a abatements).
But the 30 year mortgage? This feels like an attack on the most economically vulnerable to me.
EDIT: corrected "negative short" to "short".
I've never heard anyone describe the implicit "negative short" all renters have for housing but that totally makes sense. I wonder what the takeaway is for someone who isn't interested in buying a house soon - maybe individuals should be investing in residential REITs which match the kind of housing they pay for?
Buying real estate doesn't exactly "cancel out" your negative short position. On a long enough time horizon everyone who buys a house will end up selling it. Plus buying a house requires you to take money out of other investments, like stocks.
Buying real estate doesn't exactly "cancel out" your negative short position. On a long enough time horizon everyone who buys a house will end up selling it. Plus buying a house requires you to take money out of other investments, like stocks.
Over a long enough time horizon, everyone who was born "short housing" will die, closing out that short.
Stability, especially for children, is an unequivocal good thing. Moving often can have a very detrimental effect. 30 year mortgages prevent bubbles and macro financial changes from impacting families and provide tremendous stability. Are they a good investment? Probably but it depends on your situation. Before the existence of the mortgage, you had to save to buy your entire house while you were paying rent. This made it nearly impossible for the working poor to keep a non-depreciating asset and build family wealth and/or retirement. 10/15/30 year mortgages are one of the building blocks of a healthy middle class, alongside free education, Social Security, Medicare, Unions, 401k, 503b, HSA/FSA, etc. These are the investments we make to have a healthy society.
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"negative short" = "short short" = "long". Something tells me that
derivation is flawed.
I love the 30 year mortgage. I buy a home I couldn't afford in cash or with a substantially shorter term note, live in the house 2-4 years then sell it for a profit with no prepayment penalty. I've done that 4 times in a row each time being able to buy a house that's perfect for my family's needs at the moment.
The real problems, in my opinion, are (1) people go all-in for their "forever home" only to discover most people don't stay that long, and (2) people view themselves as owners rather than future sellers. Understand your house is a leveraged investment and you'll do well.
The real problems, in my opinion, are (1) people go all-in for their "forever home" only to discover most people don't stay that long, and (2) people view themselves as owners rather than future sellers. Understand your house is a leveraged investment and you'll do well.
> Understand your house is a leveraged investment and you'll do well.
ugh there's truth to this but it just feels so fucking dystopic. within the current systems we're playing games of musical chairs and the people who do not 'win' have further and further to fall when they inevitably 'lose' due to rising inequality/increasing exploitation (gig economy/zero-hour-ing, union-busting etc.)
i use quotes because nobody really wins when one of us loses. we have enough to satisfy the needs of every human.
ugh there's truth to this but it just feels so fucking dystopic. within the current systems we're playing games of musical chairs and the people who do not 'win' have further and further to fall when they inevitably 'lose' due to rising inequality/increasing exploitation (gig economy/zero-hour-ing, union-busting etc.)
i use quotes because nobody really wins when one of us loses. we have enough to satisfy the needs of every human.
Your buys happened to coincidence with the peaking of the housing demand in the US. Are you temporarily lucky or does this advice hold true for everyone forever?
How much good advice holds true for everyone forever?
Use this kind of stylus and don't pick a fight with the Babylonians may have been great advice, even if it wasn't eternal.
Use this kind of stylus and don't pick a fight with the Babylonians may have been great advice, even if it wasn't eternal.
Moving your family every 2-4 years sounds awful. And unless you are moving to a lower COL area each time, you’re reducing your purchasing power with each move because the prices for all the other houses went up too.
> Moving your family every 2-4 years sounds awful.
It's life for a lot of people.
Here in the UK, many renter families have no choice but to do that their whole life, with the added indignity that they don't decide when it's time to move, the landlord decides at short notice (either by unaffordable rent hikes or no-reason evictions (which are often for renovation rhen hikes too)).
Sometimes they don't know which area they will be moving to, when that happens, because they will be unable to stay in a familiar area as local rents rise collectively and what they can afford gets progressively worse, until one day they can't find anywhere local at all within the notice period.
So sometimes the children have to move schools as well at short notice.
I think stability is the main reason first time buyers want to buy in the UK, and that option is closed to many.
By now, we have an increasing number of people approaching retirement who are still involuntarily renting, and it's the leading edge of a very large demographic wave of people in that position. I worry about those because rents are getting to be higher than their entire pension will be, and government housing support is insufficient to make up the difference.
It's life for a lot of people.
Here in the UK, many renter families have no choice but to do that their whole life, with the added indignity that they don't decide when it's time to move, the landlord decides at short notice (either by unaffordable rent hikes or no-reason evictions (which are often for renovation rhen hikes too)).
Sometimes they don't know which area they will be moving to, when that happens, because they will be unable to stay in a familiar area as local rents rise collectively and what they can afford gets progressively worse, until one day they can't find anywhere local at all within the notice period.
So sometimes the children have to move schools as well at short notice.
I think stability is the main reason first time buyers want to buy in the UK, and that option is closed to many.
By now, we have an increasing number of people approaching retirement who are still involuntarily renting, and it's the leading edge of a very large demographic wave of people in that position. I worry about those because rents are getting to be higher than their entire pension will be, and government housing support is insufficient to make up the difference.
> Moving your family every 2-4 years sounds awful.
It certainly could be. We homeschool, the kids enjoy the adventure, and I've taught them how to make money along the way.
> And unless you are moving to a lower COL...
The trick is to be selective in the houses you buy and use some of the money to buy a nicer house next time. We look for up-and-coming parts of our local area that haven't been fully discovered, then sell when the frenzy hits the area.
It certainly could be. We homeschool, the kids enjoy the adventure, and I've taught them how to make money along the way.
> And unless you are moving to a lower COL...
The trick is to be selective in the houses you buy and use some of the money to buy a nicer house next time. We look for up-and-coming parts of our local area that haven't been fully discovered, then sell when the frenzy hits the area.
Ah yes ... my family follows the exact opposite strategy of yours- we sit on a house for 10 to 15 years make sure to buy on the upswing and then sell when the market is down.
Sigh.
We just bought a new house... hopefully you haven't.
Sigh.
We just bought a new house... hopefully you haven't.
From the article:
> For the individual, the fact that encouraging 30-year mortgages is a bad policy does not imply that getting one yourself is a bad deal.
> For the individual, the fact that encouraging 30-year mortgages is a bad policy does not imply that getting one yourself is a bad deal.
I live in a house that I could afford to buy in cash and are in year 15 of a 30 year mortgage. That bet worked out for me vs getting a 20% rate premium for an ARM. For me, that meant living is a smaller market and limiting my upside.
My aunt and uncle got into a pickle with this in the 80s. They were over-leveraged and underwater in a house in North Jersey. The house value crashed in the late 80s and their arm was going up a few points a year. My uncle was a bank officer and would lose his job if they went bankrupt. The job moved and he was forced to commute to some awful place without usury for a few years. It worked out in the long term but it was very difficult.
It’s hard for the average Joe to treat home like an investment. Timing is everything with investments and you always need a home.
My aunt and uncle got into a pickle with this in the 80s. They were over-leveraged and underwater in a house in North Jersey. The house value crashed in the late 80s and their arm was going up a few points a year. My uncle was a bank officer and would lose his job if they went bankrupt. The job moved and he was forced to commute to some awful place without usury for a few years. It worked out in the long term but it was very difficult.
It’s hard for the average Joe to treat home like an investment. Timing is everything with investments and you always need a home.
Well done. My father was a realtor, and taught me early to distinguish between House and a Home -- the former is a physical thing, an investment, and is your Home while you're living in it; the latter is a precious concept, but a separate one. I'm grateful for him teaching that wisdom to me and my siblings when we were younger.
> distinguish between House and a Home -- the former is a physical thing, an investment
so a 'house' is 'someone else's Home that you happen to profit from heavily'?
so a 'house' is 'someone else's Home that you happen to profit from heavily'?
Some people own their home, others rent it. Different situations suit different people.
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spoken like a true 'property investor'? if you are trying to tell me that you don't recommend your closest friends and family to buy their own houses, you've really not convinced me.
not GP, but I'd recommend buying to some friends/family and renting to others. it depends a lot on how long they plan to live there, the local price-to-rent ratio, tolerance for risk, and desire to make significant modifications to the structure. but I'd err on the side of renting.
I very much recommend ownership over rent. However, purchase is sometimes not practical, out of reach, or just not desired. I've myself been in steep markets (California) where I rented for years while I saved up a down payment.
We passed on buying several houses that would have been perfect for our (somewhat unconventional) needs, but would have been very hard to sell.
Instead, we bought a house that isn't perfect for our needs but will be easy to sell, because it has multiple in-demand features that don't really matter much to us, but matter to a large swath of buyers.
Perfect example is a childless couple who can buy a house in either a good or bad school district, with commensurate taxes and property values. They might think they're getting a steal by going with the house in the bad district... until it's their turn to sell the house.
Instead, we bought a house that isn't perfect for our needs but will be easy to sell, because it has multiple in-demand features that don't really matter much to us, but matter to a large swath of buyers.
Perfect example is a childless couple who can buy a house in either a good or bad school district, with commensurate taxes and property values. They might think they're getting a steal by going with the house in the bad district... until it's their turn to sell the house.
Yes, it's the optimal strategy to exploit the idiotic game we play and get the best of the others trying to play it. Calling it "wisdom" seems a bit tasteless, though.
> Understand your house is a leveraged investment and you'll do well.
Your primary house is not an investment, because if you sell it you are now homeless. This is literally the first thing any RIA or CFPA teaches you.
Your primary house is not an investment, because if you sell it you are now homeless. This is literally the first thing any RIA or CFPA teaches you.
No you're not. You should be able to afford many years of rent with the cash from selling a house.
Renting isn't like owning a house. You can be kicked out of your rental unit if your landlord decides to do a number of things, such as converting your rental to a condo or sell the property. Rents can go up arbitrarily.
A paid off house gives you a type of stability, belonging and security that rentals don't generally offer (at the expense of flexibility and mobility). I'm not trying to say that owning is better than renting, just that they are different enough for the "buying your house isn't an investment" statement to be mostly true.
A paid off house gives you a type of stability, belonging and security that rentals don't generally offer (at the expense of flexibility and mobility). I'm not trying to say that owning is better than renting, just that they are different enough for the "buying your house isn't an investment" statement to be mostly true.
> Renting isn't like owning a house.
True, but calling renters "homeless" would be ridiculous.
Unfortunately I think people have forgotten what an investment really is. An investment is just a capital allocation. It's not about buying now and then selling later for profit. That's called speculation. A good investment will continue to deliver value over time. A house literally keeps you alive. Of course it's an investment.
True, but calling renters "homeless" would be ridiculous.
Unfortunately I think people have forgotten what an investment really is. An investment is just a capital allocation. It's not about buying now and then selling later for profit. That's called speculation. A good investment will continue to deliver value over time. A house literally keeps you alive. Of course it's an investment.
You are assuming being homeless has an infinite negative cost. As with most things in life, becoming homeless has a certain risk and a certain downside, both of which can be estimated. Those estimates should plug into your calculation when you determine when to buy a house and for long to hold it.
Lend people money so they have more to spend, and lo and behold, prices go up. But now you are in the same situation as before except you are in debt.
That's what happens without regulation (limits on the size of the loan) or inflationary controls (rate increases). Lending exists to help amortize the cost of a big-ticket purchase so that they can grow and have security, as a business or a person/family. But when you take away the guardrails you have runaway student loan and mortgage debt. At least with the latter there is an asset that has some value.
You just described the effects of the student loan industry, too.
Two groups betting against each other
- the one who is betting the prices go up (and buys houses)
- the second who is staying out of the market claiming it’s a bubble
In the center, there’s the interest rate, where the first group claims needs to stay low so they can win/survive, but if it does, the second group loses.
In the center, there’s the interest rate, where the first group claims needs to stay low so they can win/survive, but if it does, the second group loses.
But isn't that the problem? People are incentivized to purchase homes as a speculative asset instead of what a house should be purchased for, um, ugh, housing.
I don’t see how it’s possible to not incentivise that. Houses have a huge amount of real value and would be expensive even without the land scarcity.
If you are spending a lot of money on an asset, it always has to include some analysis on investment because you always have the option to not buy and put that money on a productive investment instead.
If you are spending a lot of money on an asset, it always has to include some analysis on investment because you always have the option to not buy and put that money on a productive investment instead.
For housing to be solved, we need to reorganize society.
It's not a supply problem, it's a demand problem. Everybody want to live in the same dense hotspots, creating a perpetual upward pressure in local prices.
Not even the most powerful instrument, interest rates, solve this problem. You only need as many buyers as there is supply. It doesn't matter if 99% can't afford it, if 1% is enough to buy up the limited supply of houses, no matter the interest rate.
Not even a massive economic crash brings relief. Because the underlying demand is still there, and so is the limited supply. The temporary discount is usually not used (scared buyers) and most home owners just sit it out until prices inevitably come back. There isn't going to be a "houses now 50% off" moment, ever.
You can win a battle against NIMBY but it won't win the war. The demand keeps coming and supply cannot sustainably keep up.
Hence my simple take. You're trying to squeeze an infinite amount of people and buildings into a tiny space that is not infinite. Instead of doubling down on this idiotic idea, reorganize society.
There isn't going to be a "tweak" that fixes it. It cannot be fixed with this line of thinking. It requires new thinking.
It's not a supply problem, it's a demand problem. Everybody want to live in the same dense hotspots, creating a perpetual upward pressure in local prices.
Not even the most powerful instrument, interest rates, solve this problem. You only need as many buyers as there is supply. It doesn't matter if 99% can't afford it, if 1% is enough to buy up the limited supply of houses, no matter the interest rate.
Not even a massive economic crash brings relief. Because the underlying demand is still there, and so is the limited supply. The temporary discount is usually not used (scared buyers) and most home owners just sit it out until prices inevitably come back. There isn't going to be a "houses now 50% off" moment, ever.
You can win a battle against NIMBY but it won't win the war. The demand keeps coming and supply cannot sustainably keep up.
Hence my simple take. You're trying to squeeze an infinite amount of people and buildings into a tiny space that is not infinite. Instead of doubling down on this idiotic idea, reorganize society.
There isn't going to be a "tweak" that fixes it. It cannot be fixed with this line of thinking. It requires new thinking.
> I expect rates vol to rise in the future, so I’d better be long gamma right now.
What have I done wrong in my life so I can no longer understand news articles?
What have I done wrong in my life so I can no longer understand news articles?
The article’s point there was that the average Joe’s actions under the current mortgage system could make sense, if they were based on a deep understanding of financial markets (including the subtleties of options trading) and were betting on increased volatility of interest rates.
If the sentence doesn’t make sense, that’s arguable part of the point: the author wants you to react, “huh, average people don’t think like that, so of course that’s not a rational bet”, which is his point.
But if you want to understand the volatility/gamma dynamic and strategy the author is referring to, this gives some detail. I’ll summarize it myself once I catch up and feel I understand it.
https://seekingalpha.com/article/181382-option-strategy-long...
If the sentence doesn’t make sense, that’s arguable part of the point: the author wants you to react, “huh, average people don’t think like that, so of course that’s not a rational bet”, which is his point.
But if you want to understand the volatility/gamma dynamic and strategy the author is referring to, this gives some detail. I’ll summarize it myself once I catch up and feel I understand it.
https://seekingalpha.com/article/181382-option-strategy-long...
This isn't a news article. It's a newsletter that targets people who care about finance and everything else, but definitely finance. Rates vol means volatility in rates of interest. Long gamma means has investements for which the thesis (bet) is that gamma will rise, whatever gamma is.
Gamma is one of the greeks. They are used in finance to describe derivatives related to options.
https://www.investopedia.com/terms/g/greeks.asp
https://www.investopedia.com/terms/g/greeks.asp
"Long Gamma" in sloppy-Black-Scholes-lingo means essentially to bet on increasing realised vol, i.e., in this case on rates moving a lot, regardless of the direction.
Cf https://quant.stackexchange.com/questions/39619/gamma-pnl-vs...
Cf https://quant.stackexchange.com/questions/39619/gamma-pnl-vs...
I vote "toxic" and its cousin "optics" as the most pretentious, overused meme words of the last 5 years.
That's a lot of analysis. I couldn't hang on that long because OP had so many arguments.
However, something has to put the breaks on rising house costs like OP says, or we're heading back to pre-1930's where 60% of the population rented.
OP is right, 30 year mortgages are a way to increase prices, like what's happening in car loans: 48 month used to be the norm (80's, 90's), but now I've seen 120 month loans. 10 years to pay off a car. Yeesh.
Mortgage deduction elimination for non-primary residences is a start: that's gov't subsidy of investors. Once mortgage interest rates go back above 6% that might at least flatline prices instead of this crazy exponential.
However, something has to put the breaks on rising house costs like OP says, or we're heading back to pre-1930's where 60% of the population rented.
OP is right, 30 year mortgages are a way to increase prices, like what's happening in car loans: 48 month used to be the norm (80's, 90's), but now I've seen 120 month loans. 10 years to pay off a car. Yeesh.
Mortgage deduction elimination for non-primary residences is a start: that's gov't subsidy of investors. Once mortgage interest rates go back above 6% that might at least flatline prices instead of this crazy exponential.
Loans for profit seeking businesses are deductible by default. (They're an "ordinary and necessary" business expense.) We can pass any law we want, of course, but I doubt that we're going to see the elimination of commercial mortgage deductibility in my lifetime.
It's only toxic for people who don't do anything with it. Even in Australia where real estate prices are insane the average 30 year loan is paid off in 14 years (note this is longer than earlier times.)
Also the ability to refinance the loan can allow a person to take advantage of equity to either purchase additional properties or reduce their monthly dues. If the property is rented this can be the difference between the property requiring funds every month to one that makes the owner money every month - at which point it really doesn't matter what the duration of the loan is, because it's now producing income.
Also the ability to refinance the loan can allow a person to take advantage of equity to either purchase additional properties or reduce their monthly dues. If the property is rented this can be the difference between the property requiring funds every month to one that makes the owner money every month - at which point it really doesn't matter what the duration of the loan is, because it's now producing income.
Why would I want to sell investments that are returning an average of 7+% a year to pay off a mortgage that I'm paying 2.9% on? The bank is welcome to let me use their money.
Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.
Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.
Because "investments" could stop returning 7% at any time, mortgage interest rates could rise at any time and you can live in a house, you can't live in stocks and shares.
I agree if one chooses to invest in riskier investments, but it's straight forward to invest in financial products that provide a rate that move in lock-step with home loan interest rates.
These products are lower-earners, but there is limited exposure to risk.
These products are lower-earners, but there is limited exposure to risk.
The overwhelming majority of mortgages in the US are fixed-rate products (at this time of low interest rates). Interest rates can do whatever they want from here and it won't affect the typical existing mortgage. (If they go high enough, a legacy low-rate mortgage becomes even more valuable to continue to hold.)
How long are they fixed for? I don't know anyone to be on longer than a 3 year fix in the UK.
In the US, fixed rate mortgages are fixed for the entire term of the mortage. Anything else is called an adjustable rate mortgage (ARM) and those are often 3/1, 5/1, 7/1, or 10/1 (referring to the length, in years, of the original rate and then the period, in years, of each subsequent adjustment period [note that if you see a /6 mortgage, that's adjustable every 6 months after the initial period, not every 6 years]).
It used to be that ARMs would have a "teaser" rate for that first period, which made them make sense to take out for some circumstances. Now, fixed rates dominate because the ARM rates aren't much lower than the fixed rates.
It used to be that ARMs would have a "teaser" rate for that first period, which made them make sense to take out for some circumstances. Now, fixed rates dominate because the ARM rates aren't much lower than the fixed rates.
> It's only toxic for people who don't do anything with it.
But that's the point, isn't it? If the rare few benefit, and the vast majority do not, then the promise isn't a promise. It's a lie.
Put another way, the system shouldn't be arranged and aligned in such that - as cliche as it is - the rich get richer, and the rest suffer.
But that's the point, isn't it? If the rare few benefit, and the vast majority do not, then the promise isn't a promise. It's a lie.
Put another way, the system shouldn't be arranged and aligned in such that - as cliche as it is - the rich get richer, and the rest suffer.
The 30 year loan is not a "rich get richer" scheme. The 30 year loan is a tool to allow people with limited earning potential access to the property market, and this can open the door to passive income and generational wealth.
A 30 year loan paid off over a 30 year period is a waste of the product - one is not supposed to set it and forget it, doing that optimises the lender's profit much like paying off a credit card at the minimum rate or never checking if one's internet/phone/utility plans have become more competitive (check those annually.)
Here are typical ways that a 30 year loan is used to enhance a person's financial position:
1. If the property value has increased, the loan can be refinanced to extract this equity as cash for investments that outpace the mortgage rate. Thus a person is immediately earning passive income which can be used to reduce their mortgage or other regular expenses.
2. Competition between lenders produces competitive rates. One can take advantage of lower rates in order to either reduce their out-goings or pay off their loan sooner (thus reducing their interest.)
3. A person can take advantage of the rental market. For example a couple may rent a smaller property after their children leave the nest, while renting out their family home. The function here is that they can remortgage their property over another 30 year duration, thus they begin to earn income from the property rather than having the property cost them money. (The loan duration is less important when the property is earning you money.)
A common mindset of people is that they don't want a mortgage hanging over their head they want to "own" the property and have no "debt" - but financially savvy people will utilise their properties for wealth generation by having "debt". This means if their property is paid off, they would still mortgage it to the bank in order to obtain funds which are used in higher-interest investments, producing a passive income.
Note if you are in good standing, you can walk into a bank and take out a personal loan - then use that loan to procure an investment portfolio which earns more than the repayments. Yes you own the risk, but it's a method to obtain instant passive income, and it's not difficult to invest in solid earners (some banks will even have this as a product, although it tends to be less competitive.)
A 30 year loan paid off over a 30 year period is a waste of the product - one is not supposed to set it and forget it, doing that optimises the lender's profit much like paying off a credit card at the minimum rate or never checking if one's internet/phone/utility plans have become more competitive (check those annually.)
Here are typical ways that a 30 year loan is used to enhance a person's financial position:
1. If the property value has increased, the loan can be refinanced to extract this equity as cash for investments that outpace the mortgage rate. Thus a person is immediately earning passive income which can be used to reduce their mortgage or other regular expenses.
2. Competition between lenders produces competitive rates. One can take advantage of lower rates in order to either reduce their out-goings or pay off their loan sooner (thus reducing their interest.)
3. A person can take advantage of the rental market. For example a couple may rent a smaller property after their children leave the nest, while renting out their family home. The function here is that they can remortgage their property over another 30 year duration, thus they begin to earn income from the property rather than having the property cost them money. (The loan duration is less important when the property is earning you money.)
A common mindset of people is that they don't want a mortgage hanging over their head they want to "own" the property and have no "debt" - but financially savvy people will utilise their properties for wealth generation by having "debt". This means if their property is paid off, they would still mortgage it to the bank in order to obtain funds which are used in higher-interest investments, producing a passive income.
Note if you are in good standing, you can walk into a bank and take out a personal loan - then use that loan to procure an investment portfolio which earns more than the repayments. Yes you own the risk, but it's a method to obtain instant passive income, and it's not difficult to invest in solid earners (some banks will even have this as a product, although it tends to be less competitive.)
While the author makes plenty of good observations, there is a huge elephant in the room that he leaves out: the main problem with mortgage loans currently is that the government prints money to fund them. I don't understand how the author could have a whole section on the lender's perspective that starts with the question "Who supplies the capital for mortgages, and what are they getting out of it?" and never give the obvious answer: "The government supplies it, and gets more political power out of it by making more institutions dependent on the government".
Furthermore, it perpetuates the myth that Uncle Sam sides with the citizens / voters. The dependency drives up price which makes "affordable" an illusion. Banks are happy to say the least. The gov? It's happy as well. The citizen / homeowner? Well, if they did the math they would not be pleased.
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I could only afford a 30 year term. Now I'm half way through my mortgage 5 years later. You don't have to stick to the original repayments.
Very true I am taking the opposite bet. I refinanced last year 30 year 2.85 apr. In California so prop 13 means property taxes won't go up to fast. I have no plans to pay it off earlier. But we are kinda stuck we can sell our house for a nice profit on what I paid 5 years ago. Then I have to pay for another house that is expensive in the current marketing. Not really looking to relocate to cheaper place. So I am just hoping all the money I am putting in the stock market ends up being the right call. Who knows though. Either approach could be a good choice in the right situation.
Yeah that is a great way to go if you're comfortable taking on the risk. There is a big reward if it pays off.
I'm a bit more risk adverse but each person has a level of risk that works for them.
I'm a bit more risk adverse but each person has a level of risk that works for them.
You have to balance the returns of the market vs the cost of the mortgage. In many cases it makes more sense not to pay off the mortgage and just put excess cash into the market.
I could pay off my mortgage at any time, but I've earned more by putting that cash in equities.
I treat my 30 yr mortgage like a low interest loan. I basically take the risk that the mortgage lender doesn't want.
I could pay off my mortgage at any time, but I've earned more by putting that cash in equities.
I treat my 30 yr mortgage like a low interest loan. I basically take the risk that the mortgage lender doesn't want.
The mental relief of paying off a mortgage is much greater than any mortgage repayment schedule. The day people pay off their mortgage and own it outright is up there with birth of kids.
You do, but you also have to pick a risk profile you're comfortable with.
If I pay off my mortgage I can afford to take on more risk in the market. I can afford to attempt entrepreneurship.
It took me a long time to get to the point where I truly believed it was worth attacking my mortgage.
I prefer to have as little debt as possible for my own peace.
It's possible for me to get totally debt free in a year or two. Then I can focus on building a portfolio for retirement.
I'm also choosing to remain in my first house and not spend lots on my standard of living.
If I pay off my mortgage I can afford to take on more risk in the market. I can afford to attempt entrepreneurship.
It took me a long time to get to the point where I truly believed it was worth attacking my mortgage.
I prefer to have as little debt as possible for my own peace.
It's possible for me to get totally debt free in a year or two. Then I can focus on building a portfolio for retirement.
I'm also choosing to remain in my first house and not spend lots on my standard of living.
Discussed at the time:
The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)
The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)
Neat! But also really aged poorly how they seems to think mortgage rates price in inflation, now that rates hover at 3% with inflation this year at 6.
https://news.ycombinator.com/item?id=18830096
https://news.ycombinator.com/item?id=18830096
Public housing, land value tax, and land dividend please.
All this garbage is pointlessly complex. Pricing owership is needlessly complex. Rent all the way down to dividends at the bottom, please.
All this garbage is pointlessly complex. Pricing owership is needlessly complex. Rent all the way down to dividends at the bottom, please.
To be clear, I mean the privately owned single family homes in suburbia system, not this analysis.
but residential real estate is a smaller fraction of wealth in the usa, than almost every other country on earth.
also mortgage interest subsidies and below market rates for low income mortgages are balanced by local property taxes and stricter building requirements in the usa. Most other countries don’t have the same local property taxes.
This hit piece is typical of finance-bro screeds (and really, all
economic editorials) where up can be down and left can be right
depending on what you're promoting.
I would argue expensive single family homes in supply restricted markets is a toxic product