One of the main values in a mortgage is that money is worth less in the future due to inflation, so over time the mortgage payment actually gets cheaper. Similarly, mortgages can often be cheaper than the alternative of paying rent, and are incentivized by allowing interest deduction.
An excellent point often overlooked. A mortgage is also a great way to leverage debt and do more with money during the near term, over the full term of the note.
When I bought my first house, the mortgage wasn't cheaper than the rent - but the rent was going up every six months. The second year, I think the mortgage was about the same as the rent was going to be (if it kept raising at the same rate). After that, I was ahead.
I’m in a major metropolitan area in the South. I walked away from an underwater mortgage in 2012 and rented an apartment in the burbs - 3 bed/2 bath 1600 square feet for $1300 month.
When we bought our our house a little further north in 2016, rent was already up to $1700 a month. Now, rent for the same apartment is $2100.
Our mortgage is $2070 a month for a brand new build - 5 bedroom/3-1/2 bath - 3000 square feet.
...and a universally disastrous policy that results in higher prices, less maintenance by landlords, and less residential mobility/adaptation to changing job realities.
Outside of zoning, it is SF's original housing market sin.
That and also I'm going to have to be pay to live somewhere so would I rather put my money towards an asset I control or give it to someone else for their asset?
This can't be the full picture. If your rent were $0.01/year would you still use this argument? No? What if your monthly rent was $0.01 less than your equivalent monthly mortgage payment? Yes, right? So at what point does the decision flip? That point is where it's worth it for you to pay rent without ever owning anything.
I don't think this a good analysis of the cashflows. My rent for a similar asset, lets say a 1k sq/ft 3 bed SFH, would have to be significantly cheaper since my house can appreciate in value while sticking to a fixed mortgage who's effective costs go down due to inflation not including that my landlord is going to (if smart) increase my rent each year. This situation is highly unlikely due to the fact that the person who owns the asset is likely using leverage and thus needs to make money to cover their costs which if anything are going to be higher than mine since the cost of capital for a 30 year mortgage on a 2nd home is always higher than primary residences.
Have you ever paid for a new roof, furnace, A/C, paint, etc? Maintenance on a house is expensive. If the value of your home is mostly in the value of the house and not the land, then maintenance is usually 2-5% of the value yearly.
Our total cost of our house monthly is over twice the mortgage when you include insurance, taxes, garbage, water/sewer, and maintenance (~$5000) and I can do most things like fixing minor electrical or plumbing myself.
From the article:
- A mortgage is a bet on the value of a specific home
- It’s a bet on local real-estate prices
- A mortgage is a bet on interest rates, but it’s an esoteric one
All three make massive assumptions (read the article). For me, there is something much simpler:
- the thirty year mortgage was to lock in housing at a fixed price (barring property taxes and utilities/etc) at a fixed price where I am paying into eventual ownership
The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates. If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked.
This article spends too much time attacking a mortgage product that applies to pretty much any other mortgage, but those (like X/1 ARM mortgages) have bigger risks.
In reality - one must guage their intent (flip/keep for period of time/never sell) and choose the product accordingly.
I read some of it, he implies blame against 30 year mortgages for the 2008 financial crisis. When the reality is blame lies with exotic and adjustable rate mortgages, collateralization, corruption of the rating and underwriting industries, and political failure[1]
And you are correct, the vast number of 30 year mortgages don't last ten years much less 30. The author also skips over that 5 year mortgages that existed previously were interest only and could be called in at any time. Worse the lender could require payment in gold or cash, whichever was higher. You want toxic, that's toxic.
[1] Banks which are purely virtual organizations were 'saved' while families were physically thrown onto the street.
I read through more of it after my comment. The real issue / culprit was the creative ways to get people into homes that could not afford them realistically - be it ARMs or X-year fixed loans.
Not being able to afford a home has everything to do with stagnant wages and asset inflation. That's a policy choice our society has made. Exotic mortgages and corrupt underwriting was just trying to paper over that.
Yeah, I thought this article was going to focus on something else, like how ridiculous a 30-year loan is in comparison to a 15-year.
Somewhat informative either way, but really I feel like I learned more about Fannie and Freddie than why the 30-year is toxic, which I have my own reasons for believing.
I just bought a house and compared, for the same loan amount, the difference between a higher monthly payment (for a 15 year loan) versus a lower monthly payment (for a 30 year loan) and investing the difference between the 15 and 30 year payment at 8% annual return, and the 30 year approach came out way ahead because of the additional compounding investment return from those first 15 years. if the apr is significantly lower (4.75% vs 8%) than the expected annual investment return, it's kind of a no brainer, isn't it?
Your strategy is preferable if those numbers are correct and if the person following the strategy is actually investing the difference they saved and they're keeping the mortgage for the full term. I doubt most people are this disciplined, but otherwise I get the idea and definitely considered it myself.
I would prefer to be able to dump all of my extra income into the mortgage and be done with it in 5-7 years, which can be done with either a 15- or 30-year. I'm generally pessimistic about markets and the possibility of there being a downturn, so I'd rather not having a housing payment at all (property tax and maintenance not included), as soon as possible.
As a final note though, re: the "toxicity" of the 30-year, I think that the average person's experience with a mortgage is neither of our stated strategies. The average person isn't picking a 30-year and investing the difference between what they would have gotten on a 15-year. They're picking a 30-year, making minimum payments, probably not saving much outside of this, and potentially selling/moving or being tricked into refinancing within 7 years--when most of their payments were all going toward interest and they built very little equity into their home. That's my problem with the 30-year mortgage.
Jack Bogle, Blackrock, and other knowledgeable market participants are predicting lower future returns into the future (~4%) for a variety of reasons (structural, global and domestic growth that won’t be repeated), muting any arbitrage benefit between your mortgage rate and investment market returns. History will show (IMHO) homeowners should’ve just applied more towards their mortgage principal, and thrown solar on their roof if they could from a risk adjusted returns perspective (both “investments” I list are guaranteed, whereas the equities and non-US treasuries bond market is not).
Thanks, I just modified my spreadsheet predicting 4% annual return for the next 15 years (although the article I could find with Bogle's prediction is a decade of 4% returns) and then 7% thereafter. The 30Y loan still comes out ahead, but very slightly (less than $3000 advantage on about $2M expected value of the portfolio). Such is the time value of money.
Agree with you about solar panels (and other efficiency upgrades) - my initial remodeling plans are improving sealing, insulation, and upgrading to a more efficient furnace. Already got the smart thermostat!
Keep in mind the 30% federal tax credit on solar starts phasing out after this year, and you may have other incentives available (state, local, utility) that reduce payback time of your solar install to 4-7 years; every kw after that is free! Hope my comments have been helpful.
People play these games but the mortgage is a millstone around your neck until it’s payed off. There is a psychological value in owning your home outright than which so reduces the worry level and stress that it improves your quality of life and probably extends it.
Buying a house is one of those immense milestones in life. Paying it off completely is one of life’s major accomplishments. So a few percent ain’t worth that psychology.
Depending on the rates and down payment, it's not uncommon to need >10% gains in the invested difference for the 30-year to beat the 15-year mortgage. The 15-year mortgage has proved to be much more advantageous in my case.
For sure. In another post I compared today's rates for 30Y and 15Y with 15 years of 4% returns and still came out (slightly) ahead. I'm interested in how you determined that the 15 year was more advantageous (did you calculate what your cash flow would have been with a 30Y?) and if it was a big advantage because you perhaps got lucky with market timing and finishing up your mortgage when the market is low (which really isn't something a new mortgager can rely on), or because the interest rates were at parity with the investment returns of that era, which would make it smarter to pay off quickly.
I'm with you. I have a 30-year 3.75% mortgage and I've been throwing the rest of my money into investments. With the tax benefits (up until this year, at least, not sure where we will end up after the recent legislative changes) our effective rate is definitely less than 3.75%, and a lot lower than the long term returns I've been getting in equities.
My strategy was to pay off my mortgage quickly. After 5% down I saved anough to have a year of money to survive on if need be. After that every penny went to the principle so it was payed off after seven years. Best decision I ever made.
Adjusted for inflation, long term is more like 7%. There have been some really ugly periods where returns were a lot less, however, sometimes lasting more than a decade. For a 30 year timeline, though, it's been a pretty good bet.
>The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates
This fact is one of the central themes of the article.
>If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked.
Another central theme is that the housing and labor markets are highly related. Homeowners are least able to relocate for opportunity when it is most important to do so.
You obviously didn't read the whole article because he explicitly covers refinancing during favorable rate changes - he has a whole section on 30yrs basically being implicit long vol trades on rates.
Renting V owning can be summarized by the following points
1) you have an asset at the end of the mortgage you can sell
2) after the mortgage is ended you have a place to live rent free in your old age
Contrast to renting where you never own the place you rent and you will have to rent in your old age.
Sure, you might default on the mortgage but it’s a long processed to be foreclosed. Contrast to being evicted from rent not being paid. Both have issues on default but your chances of staying put are better for mortgaged house.
Cheap, easy credit is one of the reasons housing prices have been able to climb so high. I wouldn't be surprised if 40-year loans become more common in the future to allow for further increases.
One of the interesting things about the Canadian mortgage market is that there is no such thing as a 20, 25 or 30 year fixed mortgage. The longest term ever offered is 5 years. Amortization periods can be 10, 15, 20 or 25 years, but you need to renegotiate at maximum every 5 years.
In general the interest rates are highest for fixed 5-year mortgages, 1 and 2 years are lowest.
There is absolutely no practical way in Canada to lock in a mortgage for long term fixed interest rates beyond 5 years. This has previously had interesting effects, such as in the early 1980s when people who owned their homes, had existing mortgages come up for renewal and encountered the new 18% interest rates. Either resulting in serious financial hardship or fire-sale quick sales because they could no longer afford to service the mortgage.
Some people are currently getting mortgages which are fully ARM and hoping things maintain the status quo.
The CMHC, federal agency which sells mandatory mortgage insurance for high-ratio loans, recently implemented a new stress test.
Not to say that Canada wasn't significantly affected by the 2008-2009 financial crisis. But much stronger and stricter banking regulations meant that the domestic big-5 banks' exposure to low-quality American mortgage products was lower. And there were much fewer no-doc/no-income/poor-quality mortgages created for Canadian properties. There was definitely no domestic equivalent to Countrywide or Washington Mutual's massive tranches of shit mortgages and mortgage backed securities.
It's the same in Australia, New Zealand, UK and probably other places too. 30 year fixed rate mortgages are probably the exception rather than the rule in most places.
> There is absolutely no practical way in Canada to lock in a mortgage for long term fixed interest rates
The UK is exactly the same. 5 years is actually pretty long in the UK at the moment, 2-3 years fixed then variable is common. It doesn't seem to harm house prices.
I’d love to lock in 30 years at a low rate, would free up lots of money for investment, but since that’s not an option I have to opt for clearing the mortgage in ~6 years, and living like I work at McDonalds until that day arrives.
Probably better for my long term financial health and peace of mind, but the opportunity cost sucks.
This article strikes me as a classic example of a smart person outthinking themselves on something pretty basic. Sure, it makes for an interesting analysis. But the measured reality is that home ownership is strongly correlated with wealth, and the only way for someone who is not already wealthy to own a home is to borrow a lot of money to buy one. And the only way to get the monthly payments down is to extend the payback term. Hence: the 30 year mortgage.
But many people automatically assume home ownership is a good thing... and the government officially promotes it as well (see mortgage interest deduction).
You're right this is why mortgages exist, but you're not explaining the demand. It's also easy to imagine an alternate universe where most homes are owned by institutional landlords, people rent, and invest what their interest payments would have gone to in index funds instead, winding up with a more reliable chunk of cash when they retire instead of a home whose value is hard to predict.
If home ownership is a bad thing in this alternate universe, why would institutional landlords own and rent out homes? Why wouldn't they just invest all their money in index funds instead? Are they dumber than the renters or something?
I think it's fair to say that any scenario that works out well for landlords, works out at least as well for home owners. Because when you buy a home, you become a landlord! (Even if your only renter is yourself...)
As for why home ownership is a good thing, from a societal level, it's pretty well established that home ownership correlates to all sorts of good stuff like wealth development, better schools, lower crime, etc. But beyond that, a lot of people just like being in charge of their own stuff.
Over-extending yourself financially is a bad thing, and it's true that some people do that in pursuit of owning a home. But, other people over-extend themselves in pursuit of owning a nice car, or trying to become a rock musician, or getting rich quick with cryptocurrency, etc. Home ownership certainly does not have a lock on the category of "things people sometimes make bad financial decisions about."
>As for why home ownership is a good thing, from a societal level, it's pretty well established that home ownership correlates to all sorts of good stuff like wealth development, better schools, lower crime, etc.
I'm going to go out on a limb with no data here, but I'm fairly certain you would find the same correlations among people with equivalent wealth of any kind to that of homeowners.
Home ownership as a path to wealth building at the societal level is fundamentally in conflict with the (more important imo) goal of affordable housing. This is especially apparent in a democracy... where homeowners tend to wield an enormous (and disproportionate) amount of political power (i.e. see NIMBY).
So I would disagree that home ownership is desirable at societal level. Democratic society is better off when the default path to wealth building for the masses involves investing in productive goods (i.e. goods that create economic value.. such as the computer), rather than a good which both is necessary for everyone to live a decent life (though doesn't necessarily need to be owned) and only increases in value when there's a shortage of it for others.
> You're right this is why mortgages exist, but you're not explaining the demand. It's also easy to imagine an alternate universe where most homes are owned by institutional landlords, people rent, and invest what their interest payments would have gone to in index funds
Not realistically, because the institutional landlords will charge purchase cost distributed over expected life + maintenance/operations/management cost + return that could be earned investing the purchase price as the minimum rent (plus a bit more, because the m&o cost is also a lost investment opportunity.) Otherwise, the institutional landlords would be better off just investing and not being landlords. The savings to the renter is (something less than) the difference between what the renter would have been forced to pay in interest and the returns the landlord is giving up by not investing elsewhere, and that's before even considering the costs associated with risk-based deposits or rent premiums charged by the landlord.
> winding up with a more reliable chunk of cash when they retire instead of a home whose value is hard to predict.
Even if true, is a certain home of uncertain value better than a certain cash value with uncertain residential rents? In the former case, you at least know you have a place to live. In the latter, you know the dollar value of an asset with no certainty of what it will provide. Which is more secure?
I live in Bed-Stuy. I just don't see this pattern at all.
You can own your own home and not invest in maintenance too because you don't have the money, while landlords need to attract renters. I don't see any compelling evidence there's a trend toward live-in owners maintaining higher quality.
People who buy as their financial situation improves will naturally experience lower-quality rental housing and higher-quality ownership housing. That demand pattern shapes the housing stock, so ownership units will be nicer than rental units on average. But luxury apartments can be very pleasant, and price-competitive with ownership. In San Francisco these are very popular, servicing the legions of tech workers who have $3000+/mo to rent but not $5000+/mo to own.
Without 30 year loans and low down-payments, areas where the rent is much lower than the cost of owning a house (like the Bay Area) would have much lower housing prices. Many fewer individuals would be buying and the investment firms would not be pumping up prices on a bad investment.
I live in an apartment in NYC. It's great quality and easy. I have total financial stability: I know exactly what I'm paying in renting this year. And little time commitment: something breaks, the landlord comes and fixes it. It's predictable and I don't need to think/worry about it.
Whereas my house-owning friends in NJ suddenly need to shell out $5K to fix something I never heard of, and another $2K on maintenance of whatever, and it takes all weekend... sounds like a nightmare to me.
Your rent includes your landlord’s costs for financing, for taxes, for repairs. Unless it’s controlled by the government, your rent will go up as those costs go up.
When you take out a fixed-rate mortgage, it locks the finance cost, which is by far the largest component, for the duration of the loan. That is better financial stability than renting, and a good inflation hedge.
Repairs in a house are not that unpredictable. Every part of a house has a expected lifespan, and part of buying a house is getting an inspection that tells you where along that lifespan everything is.
That universe is hard to imagine without legislation, because landlords will have mortgages and in general rent will be more than the mortgage, so in general it will always be cheaper to own than to rent. That this is not true in all markets only indicates that speculation is driving that market, and either non-market forces are restricting supply, or the market will likely self-correct.
Ugh! Absolutely. The 30 year mortgage as a product was born out of the Great Depression. Back then, home ownership was the main path to wealth, but there was no liquidity in the housing market and bullet loans were reamortized every 5 years, which worked, until capital markets froze and there were no loans available. At that point, people foreclosed because there were no mortgage choices at their term end.
The 30 year mortgage was a direct response to that. A 30 year mortgage guarantees that you can get a loan at an affordable rate and not have to be exposed to market liquidity for mortgage re-issuance. In that sense, the 30 year fixed has allowed normal people to build wealth that they otherwise wouldn't have been able to!
> Why do you say homeowning was the path to wealth?
Americans are terrible savers. Mortgages force people to save. And while houses aren’t a great savings vehicle, they do—on average, in industrialised societies—appreciate alongside inflation [1].
Buying a house won’t make one wealthy. But it will force good habits that tend to make one wealthier.
Probably a bit strong of a word, but speaking broadly it’s rare when real estate retreats in value. I say this as someone who walked away from an underwater property after the 2008 GFC. Yes, property sometimes loses value in black swan events or in specific regions, but on average at the macro level it keeps up with inflation.
Population is growing and the earth is still the same size. The number places you can build a new home is shrinking and more people want a home - so prices will tend to go up. So it’s usually a safe bet to say home prices will only go up.
Multiply this principle by the “attraction to city amenities” and the “acceptable travel time”.
The number of places to build a new home proximate to food and leisure is limited and creates this effect near cities. Drive into the country, and there are plenty of remaining 0.1 acre plots available for cheap.
If self-driving cars substantially affect the cost of transportation time, we could see another epic flight further and further from cities, which would hold housing prices down for a long time.
AIUI, investing in the stock market has a higher expected return with similar risk over a 30 year period.
Owning a home is putting a large portion of your net worth into a single asset. From an investment perspective, that goes against the central principle of portfolio management: diversified risk.
Everyone needs a place to live, and most people aren’t going to move frequently enough where renting would be a superior option (excluding specific outlier markets like SF and parts of NYC). The mortgage interest deduction isn’t terribly generous, but property taxes usually provide for an exemption if you’re an owner versus renting. We subsidize home ownership heavily in the US.
I’m not arguing you should treat your home as an investment primarily, but if you own or plan to, recognize it for what it is, another asset in your portfolio.
Also, I have a comment in this thread where I point out that future market returns are expected to be on par with your mortgage rate; paying your mortgage down would be a better return than investing if those predictions hold true.
This was before the home equity loan and rocket mortgage refi's. Now days, if you don't have spending discipline, owning a house does not make saving easier or a path to wealth. You can set up a line of credit against your home equity and spend it as easy as writing a check or doing a bank transfer. Many companies are advertising to you that this is a great idea. Most of the people I know in the Bay Area who have bought homes in the last 20 years have spent most of the huge amount of appreciation that has happened to their homes.
They explicitly said that they don't think getting a 30 year mortgage is a bad decision for an individual. They are complaining about 30 year mortgages from a policy perspective.
> 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. The policy wouldn’t be bad if it weren’t effective, and it’s only effective to the extent that it encourages people to actually get the loans. So while I think there are prudent asset allocation reasons to favor renting over buying, if you don’t buy into those a standard mortgage is a relatively tax-efficient way to pay for housing.
Spain and Greece have higher home ownership rates than the USA, Germany and Switzerland, but far worse economies. Home ownership being correlated with wealth is the correlation of being able to consume more resources and what the policy environment incentivizes, not that one nation is wealthier than another.
I mostly bought my house for the tax deductions and a form of rent control, not as a wealth building tool. Without the deductions, putting my money into ETFs was more lucrative.
Mortgages are fairly new though. In America they started in the 1930s and were short term. Unsure when they became longer term committments, but probably not before the 50s or 60s.
I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower.
I originally used Howstuffworks, it was a bit vague. The wikipedia summary was better. So:
* mortgages before the 1934 reforms weren't quite what we'd recognize as mortgages. They generally didn't cover the full value of the house. And their widespread use seemed fairly new in the 1920s and lead to a crash
* the 1934 act created 15 year mortgages (I was wrong to say 5, that must have been the refinancing timeframe)
* the 30 year mortgage was indeed only introduced in the 1950s. So it's a rather recent tradition
> mortgages before the 1934 reforms weren't quite what we'd recognize as mortgages. They generally didn't cover the full value of the house.
Mortgages now generally don't cover the full value either, though its sometimes possible to get 100% coverage through multiple mortgages of different types; in the 1920s bank mortgages tended to be short term (5 years) and not amortized (that is interest only, with balloon payment due at the end, and limited to about 50% of value; B&L mortgages tended to be fully amortized and up to around 11-12 years, typically limited to 30% when taken as a second mortgage. 80% financing was done by taking one mortgage of each type, often with the expectation of refinancing at the expiration of the bank mortgage.
The popularity of mortgages didn't cause a crash, the general financial crash at the end of the 1920s and the Great Depression caused credit to dry up (and lots of people with mortgages that needed to refinance due to balloon payments, even if they were managing to pay the existing mortgage, to be less credit-worthy even if credit hadn't dried up), which resulted in a mortgage crisis. (While, unlike the 2000s mortgage crisis, the triggering broader market problem wasn't tied to mortgages or mortgaged-backed securities, there is a very close parallel in the two crises in how widespread dependence on short-term ability to refinance caused a foreclosure crisis when both mortgage credit tightened and a broader economic downturn impacted creditworthiness, so that lots of people whose ability to remain in their homes was based on an expected near-term refinance could not secure such refinancing.)
> the 1934 act created 15 year mortgages
The 1934 created the FHA and its mission of guaranteeing qualified 15-year or longer mortgages; 39-year mortgages were actually introduced then (based on an expected 30-year prime working age range), but became most widespread in the post-war boom; the GI Bill and VA loans played a role in this
The book isn't loading that page, but if it's referring to old English mortgages I believe those were loans from the property owner themself. And the buyer wouldn't get the house until they finished the payments. If they failed, they lost everything.
How is that any different than today? When you have a mortgage, you don't own the property; the lender does (only they've also externalized all the risk to the government via Freddie). If you fail, you might not lose everything, but you lose all the non-principal, which is effectively everything for the first half of the mortgage term. And if you fail while the market is down, you can lose even more than you've paid in.
What do you mean lose the non principal? If you buy a $200,000 house with a $40,000 downpayment, you get it back if you default and the house value is unchanged, right?
From what I read back then, you would get nothing unless you had paid everything. So pay in $199,999, miss final dollar, lose house, no money returned.
Yeah, by non-principal, I was primarily referring to interest. On a 30 year mortgage, you're paying almost nothing but interest for the first 15 years. And the realtor/title fees and taxes are losses as well. The above commenter is right to point out that the downpayment goes toward principal, though. In the scenario I posited where the housing market declines, you can still end up in the red though.
Yep.. offer financing is an easy way to raise the base price of a good.
Homes usually though make sense financially. You get something you own in 30 years so you can live in it on retirement income.. or sell it at an appreciated value (so your net housing costs are at least $0 if you are unlucky to not make any money and not have lost value.. And in some cases you can rent it out to generate income. Combine that with a low rate and it seems like a good idea. Higher rates cause lower house prices though so that's not good except we have the problem now of not enough housing so that may mitigate things.
> The thirty-year fixed-rate prepayment-option mortgage is an economic disaster. It encourages mass malinvestment. Policies designed to help low-income people build wealth actually trap them at the worst possible time. It presents macroeconomic risks (as we learned in 2008)
Well not too smart, a very low % of the defaults in 2008 could be attributed to prepayable 30Y level pay mortgages.
Owning a home is correlated with developing wealth. The average person who owns their home will develop higher levels of wealth during their lifetime than the average person who does not. This holds true even for people who start out with very little wealth and use a mortgage to purchase their home.
It might be if you are renting a private jet monthly for slightly less you could purchase. And for some reason older jets are worth more because they are parked in mature airports.
After you pay your loan off you no longer need to pay rent, and while you're paying your loan you don't pay rent. Author completely missed that point. You need significant income and housing depreciation to come out behind when you factor those two in.
In fact for my situation, even if my house depreciates to 1/3rd what I paid I'll still be coming out ahead due to paying less than I ever did for rent.
You still need to pay property taxes though which are based on your properties value.
The real benefit in my opinion is that it locks you into a permanent shelter price so that you can live someplace long term without getting priced out and if the value of your home skyrockets causing your variable price property taxes to skyrocket (california not included due to prop 13), you can sell it and make a bunch of money and then move somewhere cheaper.
If I read that correctly, it sounds like you’re assuming that rent is lower than buying, which is not true in many places (including my own city). Many people buy rental properties because they can charge hundreds more dollars...
Sure, that can happen, but probably encodes a pessimistic view about the area's future prospects. If my neighbors highly valued the option to flee, I'd want to be very careful about putting down roots.
There’s too many assumptions made in this article. Not all mortgages are speculative, many just want a place to live where they’re not subject to a landlord and all the rules that come with it, even if they don’t stay for the full 30y term.
For those that are willing or able to stay the full 30y, the nominal mortgage payment will be the same, while the value of the dollar will not — inflation will work in your favor.
The tax laws have also been recently doubled to ~24k for couples, and most home purchasers will not be running into the mortgage interest deduction judging by the median home value in the US.
It's really disappointing when people keep thinking of important life decisions as purely economical ones. No, I didn't buy a house because it's an "investment". I bought a house because I wanted the freedom to modify the place I live, adapt it to my family needs. You know, feel at home !
When I rent, I'm simply not allowed to do the amount of modifications I want to a place, and it just doesn't have the same feeling.
Thinking every single act of life in terms of economy is being blind, and blaming people for doing non economically rational decisions bemuse me. Because for me, the endgame is not hoarding money, it's spending it to live the life I want. And just because one value economic rationality very much doesn't mean we all have too. Which is why there are still some very silly people donating to charities (the fools !).
Kudos to politicians to sometimes have policies which make it easier to live a nice life, even if "the market" hates it.
So no, the 30 year mortgage is not a "toxic product", it's a good way to allow a lot of people to go in a life path that is very appealing to a vast amount of humans.
This is a great article worth reading. I found myself walking around my apartment having a conversation with my imaginary version of the author. There are at least four points that i would quibble over.
That said, i like the analysis. In spite of (imho) flawed foundations it's a solid argument. Does it capture the whole truth? I'd say no. Does it highlight a significant set of factors? absolutely.
Spend the 15 minutes, charitably read the article, decide if it's worth spending another hour picking apart the argument and the analysis. This is one that probably isn't right, but points in the direction of truth. I think the foundations are shakey, but the structure is pretty good. Fun read.
> "If anything, our policy should do the opposite of what the GSEs promote: if you have a low income, and you try to borrow money to buy a house near where you work, there should be a surtax to discourage this bad diversification. There are other savings vehicles that don’t closely correlate with your income; buy those instead!"
I think this is my favorite line. Let's tax the poor more for living close to where they work.
When the last employers pack up and leave the industrial heartland, all those mortgages are going to be deep underwater, and all those workers are going to be locked in places with no work. Many already are (see: Flint, MI). I hope you are prepared to pay their living expenses in perpetuity.
My head almost exploded when I read this. On the one hand you have a bunch of landlords which are incentivized to squeeze the poor for all their worth while looking for a reason to exclude anyone with financial challenges in their past including the massive number that correlate not with poor decisions but with ill health.
Then you have terrible people calling for taxes on the poor to tax them out of houses because they think its a bad risk and subsequently into the hands of the landlords if and only if they will have them otherwise I guess they can go sit on the corner.
Broader, let's tax behavior we think is financially unwise - for the good of those too dumb to see how financially unwise the behavior is. The author can take their condescending smugness and get lost.
Home ownership was a way to stabilize finances, by providing a way to create a known cost for the average person over the long term.
Banks made stable money through interest, and to offset the risks of foreclosure the banks quantified the risk based on income, etc.
It worked very, very well. As an added benefit to the average person: The interest paid on the mortgage is tax deductible, and the 30 year mortgage offers the biggest benefit.
More in this in a moment.
The article then goes into 2008's crisis, but this a bad example. he barriers that prevented investment banks from commercial-bank activities (Glass Steagall) were completely wiped out.
It took only 9 years (really, just 7) for that mistake to completely up-end our economy.
Now back to the interest deduction: There is now a movement to remove this benefit. Both Republicans and Democrats see this as a windfall for more tax money.
This is another article trying in a round-about way to sabotage the middle-class' only real tax deduction.
At this point the interest deduction is largely gone, at least to my understanding. The majority of homeowners will now find that the standard deduction is better than deducting mortgage interest. Especially married couples.
Isn't the focus on the 30-year fixed rate mortgage at least a little bit narrow in analyzing what happened during last decade's financial crisis? There were all kinds of negative amortization and adjustable interest loans being pushed, and I recall reading that high-leverage mortgages, not sub-prime, were where the defaults were greatest.
My idea is that local governments should play a role in regulating mortgages because defaults, foreclosures, and abandoned property have serious consequences for neighborhoods and municipalities. Counties should have and exercise a right to refuse to register liens attributable to pathological lending likely to cause local economic hardship.
"You don’t see financial advisors telling bacon lovers to hedge their next thirty years of breakfast consumption with a rolling long position in lean hogs."
No, but don't let them read this or they might start!
The mortgage concept in the US is the ticket to the American dream. It is designed to give you essentially free money over the life of the mortgage by leveraging yourself with a loan that very few people would give you for any other investment decision.
Not taking advantage of buying a house in America is a big mistake. Sure, there are plenty of pitfalls along the way, market timing can be important, location matters, etc.. but on average you are way way better off after ten years, ceteris paribus, versus someone who did not buy.
Probably not the same place as when they're 30. When you're no longer working and the kids are grown, school system and job market become irrelevant. It becomes physically harder to care for each sqft, and with a smaller household you need fewer of them. As you lose the ability to drive safely, walkability becomes much more important.
When I'm 60 I want to have the wealth to meet my new housing needs. That could be a previous house to sell. It could also be stock portfolio to liquidate or passive income sufficient to cover rent.
Does anyone on this thread currently know what the current industry S.O.P. for calculating the option-adjusted spread (OAS) on agency MBS? Back when I was doing it in 2012, Monte Carlo simulation was still the gold standard, as far as I could tell.
