The Fed now owns nearly 1/3 of all U.S. mortgages

Even if someone is willing to move to a cheaper place, they find that relative to the employment available, it isn't much better.

In the end, they realize that no matter what they choose, they need to struggle incredibly hard just to get a similar quality of life to what a baby boomer was able to achieve with a high school diploma and a manual labor job.

Meanwhile, my landlord bragged about buying the house I live in with no money down and no income check during the subprime mortgage era, and has been renting it out since. Now he is selling it during a pandemic and I’m about to become a vagabond.

I do think the vacuuming up of affordable housing by real estate investors (perhaps many of whom accumulated wealth via the surging stock market) is at least part of the problem. Landowners have strong incentives to keep the housing stock low (and the rents high), or they get washed.

My wife is from Prague. A gem of a city, but unaffordable. Too much speculative capital from Russia, China etc. Being a slave of a mortgage until 70 is a ghastly prospect.

I am from Ostrava, a post-industrial city where property prices are about a third of Prague level. Incomes are lower, but not that much lower. For an accountant (my wife is), the difference is about 10 per cent. Overall, much easier to sustain middle class life standard.

She does not like the idea of leaving her native city, but if we manage to have a child (still a very open question), we will have to, at least for a few years.

If that cost becomes too high relative to the income increase gained by living in, say, SF, people will certainly move elsewhere. But they'll still largely move to cities, and the cycle will just repeat there.

I mean, even if you got in early, you're still locking up lots of wealth in housing, an opportunity cost that could be differently spent.

For example, suppose you bought a place in NY in the 80s for 200k that's now $3m. Sure, you got in early and your mortgage has been paid off and you live without any housing expenses (outside of taxes, hoa etc, let's for the sake of argument ignore those). Let's assume we consider this to be living in 'free housing'.

But the S&P500 does 10% a year on long-term averages. It is still fully up to you to say, I like living in NY so much, that I want to forgo selling my home for $3m, putting it in the stock-market, and earning a passive average $300k a year (which compounds if left (partially) unspent, for example it'd turn into $770k a year after 10 years if not spent).

That $3m property, then, is at times a greater portion of someone's income than their own salary. I know some old people (50-60) who have nice careers, make $150-200k, yet live in a property in which $200-300k of annual investment income is locked-up. In a way, these people are 'spending' $200-300k a year on housing, while an alternative housing choice (e.g. renting a place for $3k somewhere else and selling their home and investing it long-term) would cost maybe $30-40k.

You can argue the details like whether the $3m or 10% stock return is accurate, they're just examples. But the point still stands, even those who got in early and continue choosing to live there, are continuously forgoing a lot of money (which can translate into a very high quality of life elsewhere).

I live in the capital of a EU country and own a home outright. In terms of monthly cashflow, housing is not a big deal as I just pay some taxes. Yet it's starting to weigh more heavily on me whether to stay here, or whether to sell my home, take all that money and enjoy a much higher income/consumption level elsewhere.

I used to really enjoy the city and all that it had to offer, but sometimes I now find myself just working all the time, with barely any energy, time or motivation to make use of it to its fullest.

I don't think enough people consider that you can be so called 'house poor', while owning an expensive home without a mortgage.

No. Real property doesn't work that way at all.

The effect of most of this kind of government intervention in the housing market is to subsidise developers.

In fact it's so bad that in the UK shareholders of such a developer are outraged because the uncapped bonus structure for executives at the developer means they get enormous (many times annual salary) bonuses essentially directly funded by central government which the shareholders of course think instead ought to all be profits assignable as dividends, not "bonus payments" for executives whose "performance" amounts to just sitting back and collecting free money from central government.

Like there's not even doubt there about what this government money does, it goes to the house builders, it can't and doesn't magically produce more homes, the argument is about who gets to keep the loot.

Government can intervene to actually build homes, and that would actually work, but NIMBYs hate it, so if a government doesn't actually care about housing people then a policy that can be headlined as support for home buyers but actually just puts money in the pockets of the wealthy is a good choice.

> prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house?

hence the measures are popular and very visible. Long term however (just as with subsidies and scolarships for education) all lead to pushing prices up.

Perhaps the buyers in the market could pay 10% but now that they only have to pay 5% the remaining 5% slowly (say over a few years) gets factored into the purchase price so that the down payment is the same as it were for 10%.

Another factor is that people tend to think in terms of monthly payments, rather than overall price and interest rate. For example, I'm paying $1,500 in rent while saving $500/month for a mortgage. If the requirement for a down payment is removed, I may then think it makes more sense pay $2000/month for a house now with a low down payment than to keep trying to save a down payment while prices keep increasing.

FWIW, this is exactly what happened (with different numbers) when I bought my first house.

You forgot to mention zoning law which restrict the supply of housing a lot, much more than any wheeling and dealing cities may do with developers.

Supply is simply not allowed to increase in many areas. It is not a free market, it is government controlled and the priority is to preserve/increase the property values for existing home owners, and restrict where people can live by income. Talk of affordable housing does not come anywhere near making up for the restricted supply in cities due to zoning.

There are other countries that have a much different approach to zoning, there's ideas like land value taxes, etc.

This seems like a made up problem. Those same banks would also gladly loan you $40k with $10k down, and you could have the remainder to fix the house up or make huge payments every month. Furthermore, if you already have $35k it shouldn't be too difficult to save another $15k and buy the house cash. If it is, you probably can't qualify for the mortgage payment on either property based on your income.

If the reasoning is "It is a good idea to have high education", then stimulate that directly. At the very least, have government-backed or government-supplied loans. And ensure those loans have reasonable terms.

I know australia has an interesting system.

In my country (the Netherlands), student loans are given by the government. They are hard to get rid of, _but_ the repayment terms are very very lenient. Very low interest rates (either 0% or the current 10 year government bond rate); a maximum monthly payment of 30% of what you make above minimum income; debt forgiveness after 30 years; the ability to pause repayment for 2 years in total.

I am not a big fan of this system (I still think it is too burdensome on students) but it sure seems a lot more reasonable than the US system. Even though this is also a form of debt that cannot be cleared by bankruptcy, the generous repayment terms really help. The trick here is that the government is willing to take a slight loss (through the 30 year debt-forgiveness) on repayments. Though that the moment, since our 10 year bonds have negative interest, the student loans might be making a profit for our government. Still I am not going to complain about a loan with 0% interest.

I don’t want higher education open primarily to the already-wealthy. I don’t want to deny loans to students whose family will not co-sign loans for them, etc.

Right, and an investment in the public school systems and community colleges would make them more affordable. If what the government wants is more lower income families in higher education there are many ways to achieve it. The current system encourages the astronomical increase in inflation adjusted cost of education.

> From a financial perspective it’s a terrible product to sell... tons of money to someone with little to no financial assets, iffy prospects of sufficient future income and no underlying assets that the bank can put a lien against in case of default. The problem is not the loans, it’s the whole higher education system that needs a total overhaul including the utility and price of higher education. The current system is based on the idea that many people’s parents encountered where a good summer job and maybe a bit of savings was more than enough to pay for a decent college degree!

This is literally what governments and regulation are for -- do things that are not profitable in the short term (ex. inventing GPS, the internet, etc) for strategic advantage.

In 10/20/30 years, the countries that do the best will be the ones with more intelligent/flexible lower and middle classes -- we can already see rapid cannibalization of industries happening on a large scale.

Negative mortgage rates are of course possible - they happened in Denmark, for example: https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-y...

The mortgage industry is bewilderingly complex but short version is- most loans are almost immediately sold to Fannie or Freddie, not kept on the books of those who made them. Fannie and Freddie then securitize- make bonds out of combinations of those loans- a large portion, tho not all of loans they buy. The Fed is buying a lot of those bonds, probably generally the ones backed by the most risky payers, but the analysis is extremely nuanced.

That is why the Fed owns 1/3 of bonds, which (only) equate to 11% of total loan value. This prop on the market is much more powerful than 11% suggests.

I don't understand why people make wild claims that everything is distributed to only a few hands, thats preposterous. If you really believe that, you are poisoned by ideology.

During communism, people with the only currency left - power - manage to get all the best things (which can be food, if everyone is starving, or luxury item, if people are not starving yet). In a free market luxury items eventually become common goods.

That's why most common people have a phone, a vacuum cleaner, a microwave, a tv.

And while it may just seem that the rich get richer, the poor have gotten far richer under capitalist systems than any other form of economy.

Also, this thread is literally about how the housing market isn't a true market...it's a government run welfare program backed by the Fed. You're proving my point.

But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well.

But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake.

So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies.

Whether this is likely is another story.

It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods.

In any transaction, both parties are typically better off after having made the transaction, else one party would refuse.

The U.S. clearly benefits by acquiring goods, but is China really left scratching their heads with what to do with the dollars (and then throwing a dart and purchasing treasuries with their overflowing dollars)?

If China (in aggregate) is never interested in buying our goods, why would they want to compound the number of tokens that can be redeemed for future goods (by buying bonds)? Do they simply not want to buy goods now, but know they will want to in the future? Are they entirely interested only in the assets, but think the goods are not valuable, or at least not valuable for them, but maybe are for others? Doesn't that put into question the value of any assets the country might have to offer if the goods that the country provides are seemingly undesirable?

Clearly, the value the U.S. is providing can't simply be as the purchaser of a good. The U.S. is trading future obligations for current goods, and the trading partner must have some belief that they will eventually execute that option on future obligations, or trade the future obligation to someone else who will want to execute it, else this token clearly has no value.

However, I do also wonder how much of the demand of U.S. dollar is simply a system of inertia. At some point the trading partners may realize they have no interest in acquiring tokens that they will never redeem, even if this token can be compounded further for more tokens that will never be redeemed. Currently, it seems China is interested in acquiring these tokens because of the reserve currency status, as they trade with other partners in.

The other possibility is this entire narrative is incorrect, and there are other benefits to running massive trade surpluses beyond the future token redemption. Skill building could be one these benefits - the deficit trading partner (U.S.) is shaping the development of labor markets in an journeyman-like form.

ECB balance of assets purchased: €2.9tn(August 2020) Eurozone GDP: €11.9tn (2019) So 24%

Fed balance of assets purchased: $6.3tn (September 2020) US GDP: $21.4tn (2019) So 29%

Even if you look at total assets on the balance sheet (Including assets purchased outright and collateralised loans), the difference is not that huge: ECB: €4.7tn (39%) Fed: $7.0tn (32%)

What the Fed accomplishes by handing out the $1 trillion is this: they kept all the _other_ money circulating. If people wanted to hoard $1 trillion because they're scared about the future, well, now they've hoarded it. They feel safe and they spend the rest of their money, and the economy keeps humming along.

If instead they'd tried to hoard that $1 trillion without Fed intervention, there'd be an economic collapse.

That seems to be roughly correct. And yet, we are not seeing inflation.

The conclusion seems easy to me (perhaps too easy). The average person is not seeing much of that money being printed. Instead, all of that money seems to be causing massive inflation in the stock market. The S&P500 and other similar indexes are incredibly high.

This is not caused by their expected cash flows growing. Instead, it is is caused by the expected returns of other money falling. Hence the expected 'time discounted cash flows' are increasing, simply because the discount rate is falling. Or, in simpler terms, stocks prices are rising because people with a lot of money to spare need to put that money somewhere. And these people are getting a lot of extra money.

This effect is not a total waste. It should mean it becomes easier for new ventures to raise money on the markets. This could enable the creation of new businesses and innovation.

However, it could be a lot more effective to give this money to people who would do more with it than try and find a place to store it where they can still make some money of off it.

The corollary of this situation is that the Fed must not allow debt rates to rise, otherwise an enormous wave of corporate defaults within a short timeframe would ensue.

This also explains why markets keep rising even when the economy is in shambles. The Fed will be a buyer of last resort for everything (the "Powell Put"). Yields are near zero for everything "safe", the money in the funds has to go somewhere, so it goes to assets like stocks and corporate bonds. Stock prices go up, bond yields go down. Corporations can get cheap debt to buy back their own stock.

Meanwhile, the Fed can act like there's no inflation because the CPI doesn't reflect these capital flows, at least not in the average. However, if you split up the CPI, you see significant inflation in some areas, whereas you see natural deflation (due to better productivity/technology) in other areas.

The individual or the mom-and-pop store indeed do not have access to this capital, they are footing the bill.

Current 30 year rates in the EU are comparable to the US ones, maybe even lower.

I got another mortgage in the deep of the aftermath of the 2008 crisis (2010/11 or so) and I had the same situation; rates were a bit higher then. I modeled various scenarios and basically a long fixed term mortgage would only be better if rates would double after, IIRC, 3 or 4 years after I got it. Despite my instinct that screamed 'NO' at variable rate mortgages, I got one anyway - and instead of going up, rates went down, significantly (in terms of their effect on monthly payments - I'm now paying more than 10% less per month than I did at the beginning).

Much of this is completely counterintuitive. This was the first time that cold hard reasoning and financial modeling made me direct profit, and it has done so several times since, but I also have to admit that it took me years to overcome the mental blocks and feeling of uneasiness that following through with real money on decisions that are based purely on facts. I know several people who got fixed terms mortgages around the time I got my first one, and they're still happy about it, they prefer the stability - even though they rationally know there is literally no downside to the variable rate one.

All that said, the Euribor-based mortgages mentioned elsewhere where you actually get paid for having a mortgage are no longer available :)

In other words, if you sit on your money, it might evaporate at a rate of -3%, but if you loan your money, it evaporates at a rate of -1%.

edit: for example, my mortage was the monthly Euribor-rate + 0.9% margin. Euribor-rate = -0.5, I pay 0.4%. But there are people who managed to get just a 0.5% margin. They pay nothing or get money back.

things are a little better in the other classes of loans but not much! if the economy stays weak and jobs dont come back, some metros may well see a housing price decline. Atlanta, Houston and san anton.

But from a practical, tangible, rubber-meets-the-road, this-is-how-they-do-it point of view when the Fed buys something, it pays for it by writing a new number in my Fed account. That new number is money.