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.
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.
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?
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.
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!
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...
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.
> 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.
I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower.
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.
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.
Well not too smart, a very low % of the defaults in 2008 could be attributed to prepayable 30Y level pay mortgages.
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.