Mortgage interest rates at all-all-all time lows. It's a little ridiculous to say that given that mortgages are, say, a 50 year old product. All time not very long.
But debt and interest have been with us for thousands of years and it is likely that there has never been such low cost liquidity for durable assets (houses) as there is now.
When you think about why THAT is, it should make you worried to buy that house.
There's only one way for interest rates to go from here, and home prices vary inversely with those rates. For middle class folks still working, I'd say save your money and wait for the next housing collapse. Sure, interest rates may be higher but you'll have cash. Or I could be wrong...
I'd pull my emergency fund and short term savings accounts and put it in a safe in my home. The rest of my fiances would be either virtually unaffected or would benefit from negative interest rates.
Physical dollars are an important medium of global liquidity. Taking them out of circulation is not in anyone's interest. In fact, taking them out of circulation would be extremely bad. Hard to communicate how bad this would be. Pretty much a crossing the streams/total protonic reversal outcome.
Could bad outcomes be prevented? Stunts like what was done with Indian currency, or a move to all-digital currency? I don't see it.
Since hoarding of the polymer bills seems like a likely outcome of negative rates hitting consumers, and this would be bad, and in the absence of other preventative measures, I highly doubt we'll see negative rates at the consumer level.
Possibly but there’s still a long way down to go. I can’t fathom negative rates but I wouldn’t be shocked to see rates get below 2% and maybe stay like that a long time.
When the economy was roaring a couple years ago the Fed was starting to bump rates up it shook the markets bad. Started ratcheting down since.
If they can somehow get inflation higher then I could see rates moving up a bit. But it just hasn’t happened. So much of the rest of the world has lower rates (much lower) as well.
Unless you need a place to live now, especially during WFH craziness related to COVID...
Also, Trump or even his successor might juice the economy quantitative easing, meaning that cash you are saving in the bank becomes worth less anyways. This isn’t an easy decision to make.
To be blunt- the other side of the deal is REALLY INTERESTED in having a party committed to 30 years of payments on a valuation that, they realize, almost certainly has to drop.
Mortgage interest could be 0.5% and lenders would...probably still make the deal.
The property itself is collateral for the loan. If the value of the property tanks, and then the owner is also unable to pay their mortgage due to not having a job, then in many cases the bank ends up holding the bag. This happened quite a bit during the Great Recession.
Also, given the way that the Fed has been pushing interest rates to near zero, and with the chance that they could go negative (which I find pretty unlikely, but everything seems so wild right now so who knows) there is a chance that inflation could come into play and keep property values high.
The mechanics you describe are not so much factors any more. Lenders don't keep properties on their books, too much risk and plenty of opportunity to sell and diversify. In that model, flows matter, not values.
And inflation- in my read inflation is due to a scarcity of money- it is an output of money scarcity, not an input- and what we have now is an abundance. So it is exceptionally unlikely.
But at a macro level, values are still extremely important. If there is perception of deflation, flow drops. And there are more govt structures set up to maintain values. I just have less confidence in their ultimate efficacy, and more confidence that politics will change and immigration policies will change and building policies will change.
I'll admit I'm not an expert in this area, but it seems like whoever is buying these loans should be doing some due diligence on the property associated to these mortgages, right? It then follows that the lenders should have to do some due diligence up front so that they don't get stuck with something they can't later resell.
The vast majority of loans- basically every loan under $500,000 in most areas of the country, $750,000 in high cost areas, are bought by government-backed entities- Fannie Mae and Freddie Mac. They do the purchases at scale- hundreds of thousands of loans a month. See for instance the introduction to
What happens next is a very complex balancing act where some of the loans- mostly lower performing- are kept on Fannie's and Freddie's books, while others- mostly higher performing- are packaged into securities.
And again, what matters are the flows, not the values. The actual value of a property can be seen from auction/foreclosure sales, which are inevitably at a fraction of the prior sale price.
But Fannie/Freddie and holders of larger mortgages that are not performing manage the flow into foreclosure very carefully, in order to maintain prices and confidence.
This is a very, very complex machine. Maintaining values on one side and liquidity on the other is the purpose of this machine. I make no claims to deeply understanding it. I see the value of flows, of getting more commitments from people to feed their income into this machine, and see that reflected in the change in rates, and in the change in valuations. In terms of buying in- what is one buying into?
The other side of this argument is- what actually happens if someone is not able to make their payments? There seems also to be accumulating evidence that there is far more forgiveness for failing to pay a mortgage- even before COVID.
That all smells to me like a value bubble that pops when the end game for COVID is clear, with collateral damage for those who have commitments to flows for the long term but who may need to make changes in the short term.
Lenders make money on origination (closing a loan) not servicing (interest). So there is a strong motivation to originate more loans and sell them quickly. In a bad enough environment the pressure will be to make as much money before the shit hits the fan.
They’ve really been doing well selling refinancing for quite awhile now too. The interest rate is nearly immaterial to the closing costs, Selling points, PMI, etc.
What's becoming increasingly clear is that the submarkets of urban condos, urban SFH, suburban condos, and suburban SFH are dissociating and exhibiting their own dynamics.
The fact that people are now working from home in very large numbers can make multi tenancy buildings noisy since people are SIP but making the sort of noise they'd make at the office, endless socializing on Zoom, phone etc. This claustrophobia is not likely to change soon as corporate balance sheets are lightened by the removal of commercial rents, HVAC, cleaning etc costs and WFH becomes the defacto norm.
Ergo more living space and noise exclusion is suddenly at a premium even if just suburbia.
