The 30-Year Mortgage Is an Intrinsically Toxic Product
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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.
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.
Outside of zoning, it is SF's original housing market sin.
Rent on a nice place was $325 / month. One year, they announced a bump to $375. Big jump!
We went looking and got a starter home, 15 year fixed, payments of $425 / month.
No brainer as we watched rents rise right over our cheap mortgage.
My income improved and we put some of that into the house. Paid it in 11 years.
Sold the home for $125k.
Rents at the time were something like 800 / month.
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.
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.
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!
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.
See https://www.mtgprofessor.com/A%20-%20Term/30_years_or_15.htm
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.
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.
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.
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.
Basically you just cover the interest and gamble that by the time you sell it the price has increased.
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.
https://jacquiebushell.ca/2017-mortgage-rules-changes-explai...
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.
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.
Probably better for my long term financial health and peace of mind, but the opportunity cost sucks.
http://www.tdcanadatrust.com/products-services/banking/mortg...
The rates for 10 years are always high.
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!
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.
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.
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.
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.
[1] https://www.amazon.com/Safe-Houses-Historical-Analysis-Prope...
I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower.
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.
Mortgages are quite old.
> In America they started in the 1930s and were short term.
No, they are much older. There was a mortgage crisis in the 1930s, but they weren't introduced then.
> Unsure when they became longer term committments
Well, the modern term of 15+ years was a result of mortgage insurance policy of the FHA, established in the 1930s in response to the crisis.
> I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower.
The last part is true, because they would be harder to afford despite lower cash prices.
* 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
https://en.m.wikipedia.org/wiki/National_Mortgage_Crisis_of_...
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
https://books.google.com/books?id=Z_NnBwAAQBAJ&pg=PA281&lpg=...
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.
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.
The problem is people buy homes automatically thinking they will rise in value and they will make money off of it.
Buy a home to live in.
Take NYC's outer boroughs. Same block. Buildings built at the same time.
The owner-heavy condos are in far better shape than the ones that are mostly rented.
There is a huge social benefit to ownership.
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.
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.
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.
And again: you’re paying for repairs either way.
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 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."
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.
Owning a private jet is far more strongly correlated with wealth, but that doesn't mean it's a good investment.
It’s generally advisable to cover your short positions.
> 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.
https://qz.com/167887/germany-has-one-of-the-worlds-lowest-h...
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.
Well not too smart, a very low % of the defaults in 2008 could be attributed to prepayable 30Y level pay mortgages.
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.
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.
I own a two beds family home in this area with an estimate price of $400,000 and I pay $1,700 in the mortgage every month.
That comes down to $20,400 a year.
Now the appreciation rate of a house in the US is about 5% every year.
In a $400,000 home, that comes down to around $20,000 in appreciation every year.
So in theory, I'm only spending $400 for my housing.
After the recession in 2008 though, some houses have been appreciating at a rate of 20% or more.
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.
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.
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.
I think this is my favorite line. Let's tax the poor more for living close to where they work.
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.
I'm goddamn disgusted.
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.
A married couple at the upper-end of the mortgage interest cap who also provides donations can still exceed the $24,000 cap.
Finally, I believe the boosted standard deduction expires in 2025.
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.
No, but don't let them read this or they might start!
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.
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.