Hacker News Reader

Comment by matwood | Hacker News Reader

> 1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.

Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.

This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.

View on HN

> The price alone is mostly irrelevant for the buyer.

Sorry but wow. This is not the kind of comment I expect on HN, but rather from my uncle:

“We got this new Lexus, it’s only $500/month!”

“Yes, for 200 years”

People think of houses in 15/20/30 year loans, so yeah payment is what matters. Few people are fortunate enough to be able to buy their first house with a 15 year loan. Interest rates moving are big drivers on house prices because long loans are greatly impacted by small moves.

Houses are nothing like cars. I haven't had a car payment in many years. I'm still a long ways from never having a house payment.

OP is describing how incentives cause people to behave, not suggesting you do the same.

But it is in fact how the majority of home buyers operate. "Can I afford it" translates into "can I afford the monthly payments", not "can I afford the total purchase price".

I saw this vividly when I bought my first house. It cost $61,000. My mortgage was at 9%. Two years later, mortgage rates had dropped to 7%, and my house was worth 90,000 (state appraised value). If I had bought the exact same house two years later than I did, I would have had the same monthly payment. That stayed constant, and the interest rate change drove a change in total price.

Part of the reason is: What is your alternative? Typically, renting. What's rent? A monthly payment. So if you're looking at a buy vs. rent decision, a big part of the decision is monthly expense of renting vs monthly expense of buying.

I'm sure most of you are well aware, but for anyone reading that isn't aware of the nuance:

> is monthly expense of renting vs monthly expense of buying

Note: "monthly expense of buying" is very different than "monthly cash flow of buying".

The "monthly expense of buying" is the monthly interest paid, taxes, and maintenance.

The "monthly cash flow of buying" is the monthly mortgage paid (principal and interest), taxes, and maintenance.

When deciding to buy a space, you need to use the "monthly cash flow" to ensure you don't default on the loan. When comparing buying vs renting a space, you need to use the "monthly expense".

Yep. That rent you pay is money you'll never get back. At least when buying you have a decent shot of someday recovering the principal (unless you bought at the peak and there's another housing crisis.)

You expect people on HackerNews to not accurately represent how society views something? There's a reason why the phrase "what's my monthly?" is a thing. Car dealers pushing 7 to 8 year loans is because people are worried about their "monthly." Same for rent-to-own places, mobile companies, and everyone else in the lending business.

When I decide to buy a $25k car because that's as much as I'm willing to spend I still need to determine what my "monthly" is. It matters what my monthly is because it is _a loan_ that I need to pay back every month. If I didn't need to think about what the monthly payment was I wouldn't need to take out a loan (unless I guess you got a magical loan that could only be paid off as a lump sum?).

You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.

> You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why

I believe what he is actually saying is that most people _only_ care about their monthly payment.

Yes, this seems like the critical distinction.

Caring about the monthly repayment is important.

But so is caring about the interest rate and the principal.

>You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.

I stopped into a car dealer to look at a vehicle a couple years ago. I liked how it drove, could pay cash, but wasn't opposed to taking out a loan if I could get a better price overall (sometimes possible with fees banks pay to used dealers for getting a loan originated).

In my experience, they brought out a sheet of paper with a range of what the monthly payment would be. I asked about interest rate, and the sales guy had no idea what interest rates the payments equated to - but he could get me an exact payment after doing a hard pull on my credit. They resisted negotiating on the total cost of the vehicle, but were very willing to extend the loan out to make the payment exactly what I wanted/could afford.

I could see it wasn't going anywhere, told them to call me if they get serious about reducing the price, and left. I found a great car on the private market a short time later.

Exact same experience here. The salesman (and his manager, lol) just couldn't grok that I don't care a shred about what monthly payment they can math their way into. I'm looking at the total price of the car. It was like we were speaking totally different languages. Even after I tried to explain it with "Let's assume I'm going to pay cash..." they kept trying to steer me into their finance department. Obviously they make more money on the financing than they do selling the car itself. I basically won't go to a dealership anymore.

I did my house shopping the same way. For some reason realtors are a lot better about negotiating the actual sale price than car dealers are. I never really had a realtor try the "So, tell me about your maximum monthly payment!" pitch on me, probably because you're expected to have your financing lined up before you shop.

If you're going in to buy something with a "max monthly I'm willing to pay" in mind, you are setting yourself up for a really bad deal.

My wife and I always pay cash for cars. The last time we bought one, they looked at us like we were very weird for...well, having the cash to pay for a car.

Then again, we basically didn't go to a dealership other than for test drives. We e-mailed every dealer within an hour and a half of us with "This is exactly the make and model we want, these are the options, this is the color (but we're open to substitutions), what's your best price?" We took the lowest bid, and if there was any funny business (there was with one), we walked.

Most dealers now have online sales departments that are setup for these low-overhead but low-price transactions (this was a rarity when I bought mine in 2009). Apparently the sales guy we bought from sells 3x more cars than the next-best sales guy at the dealership, because he knows how to price the cars to move online and then acts straight & efficient when the buyer comes in.

A family member bought a very nice, decked out, brand new truck. He could pay cash, no issue. They gave him many thousands of dollars of discounts for financing it if he promised to keep the loan for 3 payments (or their fee from the bank would get clawed back).

He held up his end of the deal, paying 18% interest on a massive truck loan for 3 months.

The sad thing is many people would do the same thing without the ability to pay it off in full. At that interest rate and a ~7-10 year loan term, you'll be upside down on the vehicle until the very end of the loan. And most people wouldn't keep the vehicle that long because something else changes in their life...or they just want a newer vehicle.

I have a friend on FB who said he did the same thing, minus the verbal agreement, and made sure the loan didn't have a pre-payment penalty. He then paid it immediately, which I assume led to a strong talking-to for the employee that authorized that sale.

You can usually get a significant discount, usually to the point where the dealer loses money on the sale of you're willing to finance. In specific the finance kickback on a new car can be $2-3k+. Just make sure the financing doesn't have a prepayment penalty.

I was able to avoid this by buying from Carmax, where they really didn’t seem to care that I wanted to pay cash. They offered financing but didn’t push after I asked about the interest rate and declined. They also took a personal check (rather than requiring a cashier’s).

> When I decide to buy a $25k car because that's as much as I'm willing to spend I still need to determine what my "monthly" is.

I haven't owned a car and i'm almost 30, and have always enjoyed public transport so far.

When I'll decide to buy a car, I'll just f-ing pay it in full and be done with it.

Even if you can afford to pay it in full, if you have a cheap loan available where the interest payment is less than the after-tax interest you would otherwise accrue on it (as an investment of some sort) then overall you might come ahead on the deal by taking the loan. This may be true even if you don’t invest it per se but use it to pay off debt at a higher interest rate. Since a car loan is secured against the car itself often it will have a lower interest rate than credit cards for example.

Car loans are 0% for anyone with good credit right now. We live in a managed economy now sadly, so you are actually throwing away money by paying outright instead of taking on interest-free debt and doing almost anything else with the theoretical reserve-principle; even sticking it in a checking account is going to be a net gain.

When I'll decide to buy a car, I'll just f-ing pay it in full and be done with it.

That's what I did, and as such I agree, but just be aware that you might very well end up paying more overall that way (assuming you're buying a new car from a dealer).

The point is the total loan amount is mostly irrelevant if the term is flexible. It used to be that 6 or 7 year car loans were basically unheard of... 3 or 4 years was the norm.

Another example is most people never pay off their mortgage. Some refinance, often several times, resetting the term. Eventually they'll sell the house, pay off the mortgage as part of that transaction, and keep the change (if they're lucky.)

One of the biggest financial issues facing this and other countries is people are conditioned to base affordability on the monthly payment. From cars and homes to every day subscription type services like Netflix to your cell bill.

Salesmen, well auto sales, are trained on the four square method to get you to buy. You could attribute the mortgage crisis a decade back as falling into this situation.

The barrier to buying a home used to be the down payment but creative financing is what got a lot of people in over their heads. It all about that cost per month.

Now people who over reach tend to forget all the other costs that come with auto and home ownership, namely insurance but owning a home has long term costs too.

https://www.consumerreports.org/consumerist/dealerships-rip-...

I wonder whether the ability to discern description and justification is correlated with other abilities. I suspect it is, but if anyone is aware of studies I'd be interested.

An important difference is that cars are a purchase with an expected eventual value of close to zero where as houses are typically seen as an investment with a goal of being to eventually sell it for more than you paid for it.

This means that car payments are more of a cost of ownership and house payments are more of a reoccurring investment.

As long as the house is actually a good investment, being able to afford the down and monthly payments is the most important thing. Rather than spending vs saving/investing, the trade-off becomes more of investing in real estate vs investing in something else.

When you're in a bidding war with people who reason this way, your only option is to do the same or stop playing the game.

Where "stop playing the game" means get out of hot housing markets :/

You're still not out of the game, since those insane prices are reflected in the rent prices.

Most of a car's price is decided by its company before it's even assembled. If I'm buying a car with cash it's irrelevant how other people pay.

House prices are defined by demand. If your uncle wants to buy a house with a 40 year mortgage of half his salary, then I'll have to pay more to match it.

Assume a 30 year fixed mortgage. Say the buyer pays $1 million total, the interest rate determines the purchase price. But why do you care? Either the seller or the lender will get the money.

> The price alone is mostly irrelevant for the buyer.

The price is certainly relevant when it comes time to sell, and a high price due to low interest rates leaves you more vulnerable to price shocks in the event rates need to rise.

Of course we haven't seen any major price depreciation due to rate increases in the last few decades :)

Sure, but the point is the buyer only looks at the price as a function of the payment they can afford. If the buyer can afford 2k/month they don't really care which part moves. Rates or price? If that means high rates and lower price? Fine. Low rates and higher price? Fine, but carries more risk as you (and I pointed out).

Certainly true. Though higher price with lower rates, assuming monthly payment is the same, can be beneficial as a larger percentage of your payment goes towards principal. That only holds as a positive if price doesn't drop due to interest rate increases.

But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.

It really depends. If you want to pay 100% cash for a home then yes, high interest rates are the best time to buy. But with interest rates currently below market returns, you're maybe best off borrowing 80% and using your remaining cash for a diversified portfolio of liquid investments that will likely outperform your APR long term.

If you view homes as day trading then yeah, there's risk in interest rates. But it's a home - a place to live if it's a primary residence. Ultimately if interest rates go up I don't really care since I don't plan on selling anytime soon. It doesn't change MY monthly payment. And if I did want to sell, well I'm staying in the same market - housing. So prices would drop across the board. So yes, maybe I can't sell my home for much profit or even a loss, but my home isn't the only one affected by this. Because you're in the same market, whatever you trade it for will have suffered a price drop as well.

Likewise if you buy a home while interest rates are high and they fall. Your home will have gone up in value but so will any other home you want to buy. So you're in a similar situation.

So I'm not worried about tail risk here. You do expose yourself to risk, however, if you buy more home than you can afford and we run into rough market conditions which put your income at risk. If you can't cover until things improve then you end up like the many people in 2008/2009 that lost their homes due to being over leveraged (mortgages are leverage, after all). This isn't unique to homes, however. Margin has its risks.

Here's how I see it, and I realize I'm fortunate: If interest rates begin to rise considerably over the next decade, reversing the trend of the last 40 years (!!!) then I'd consider pulling a portion of cash from certain investments to buy a home with cash after selling my current home for whatever p&l I get - if I want a new home. Or I'd just continue to live in my home and not worry about it. After all, I view my home first as a place for my family to live comfortably and then secondly as something I could make a return on one day maybe. But that isn't my primary concern.

If anything, I'd probably stay in my current home and then buy a second home (a vacation home, rental, etc) with cash.

> But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.

Don't forget the tail risks of inflation.

The risk of not buying a house in a low-rate environment is that inflation takes off, the price of the house goes up 10x to match the price of everything, your rent goes up alongside everything else, but the people who bought still have the same payment as before. Interest rates went up to ~18% in 1981, but that still didn't take average prices down from the $47K in 1980 back to the $17K they were in 1970. A real estate bear market is usually 10-20%, not the 3-10x that home prices go up in a high inflation environment.

You seem very knowledgeable on the market trends. What do you think the effects of COVID-19 will have on the market, given unemployment broke records and all that?

If you can count on stable employment for the next 20 years, you can make a plan like that. Otherwise your fallback might be to sell the house before it's paid off.

From a HN perspective, this means it's hard to buy a house and do a startup; you'll never accumulate enough savings to reduce the risk.

In the inflation-adjusted past, you had the option to save up $100k or get a $5k/month mortgage; now you have the option to save up $1M or get a $5k/month mortgage. The monthly payment hasn't changed but the space of options and (and their risks) certainly have.

We did a little bit in the 90s when interest rates increased, and I think the rate increase in the late 2000s was responsible for at least some of the drop in home values, although how much was obscured by the housing bubble, and low interest really acted like a multiplier there.

https://fred.stlouisfed.org/series/CASTHPI

https://fred.stlouisfed.org/series/FEDFUNDS

But you're right in the sense that we haven't seen the drop in home values (or any high capital asset) associated with the increase in interest rates of the 60s through 80s.

That's because interest rates having generally trended down from the mid-teens to zero in the past forty years.

Unless we're willing to go negative, that cycle is coming to an end.

We kinda have gone negative with QE, but yeah, interest rates are likely to come up sooner or later.

Yeah we had a long-term plan to buy a house this summer and we stuck to our plan but it's definitely scary thinking about what will happen when interest rates rise, if we ever wanted to sell. I guess the counterpoint is that the whole market should move in lockstep, so if rates go up and the price of your house goes down, at least the rest of the market should be affected equally.

It kills any idea of getting a real return on your house but frankly that was not a real thing through most of history anyway.

Yeah, the real return is the equity. The house can act as a small savings account over time. But even that is questionable unless you're prepared to move out at some point, which means transaction costs and buying something new.

IMO, for primary residences you did the right thing (if you want a house of course).

I've come to terms with the fact that in most markets a home is not the best way to use your money in terms of return. However, you get to live in it and that's priceless. And like you said, it acts as a savings account over time and that generally works out as people will eventually downgrade after their kids have left.

Another nice thing about owning a home is you can improve it (additions, adding bathrooms, etc) and certain additions more or less pay for themselves in terms of "getting your money back" over enough time. Again, probably not going to outperform the market, but you get to live in it. So even if the market tanks for a few years, I still get the benefits of whatever I've invested in my home.

The trick is to not overspend on a home. Too many people use all their savings to make a downpayment and then use too much of their income to pay for it. This can not only get you in trouble but also puts you at a serious disadvantage in terms of accumulating wealth.

The point of most things that you can buy should be the thing itself, not its investment-value. If not there is probably rent-seeking going on, i.e. a market failure.

All things degrade due to entropy. Things cannot truly become more valuable by themselves.

Land?

I think raw land is one thing that can become valuable on its own. Of course billions of years from now it will be gone.

Where I live the land is very much a big part of the cost of the home. The structure is worth what it would cost to demolish plus rebuild it minus existing wear and tear/needed repairs I figure. The value of the structure doesn’t appreciate as fast as the land it is on due to degradations as you’ve pointed out and materials/labor usually not increasing as fast as appreciating assets which the land itself is. Of course in many locations the structure is worth more than the land it is on.

Hence location being the most important part of the equation as any real estate agent will tell you.

Land, i.e. the classic example of rent-seeking.

The land doesn’t become “valuable on its own”, it’s just used to extract value from other things.

> In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.

> ...

> As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.

Wealth of Nations

Your local area matters a lot too. Is your city gaining or losing population? Is there new development adding units onto the market, or have NIMBYs locked it up? Do local tax laws incentivize long term owners over short term owner? All of these can have an effect that'll blow interest rates out of the water.

But people sell houses based on price, not on the monthly payment. It's possible that high monthly payments reduce the ability to sell a house for a high price, but is this effect that strong?

Absolutely, which is why I said it's mostly irrelevant for the buyer. If the seller purchased in a lower rate environment, they may be in for a tough time. Down payments and equity can soften that blow a bit.

> This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future.

They can stay high or low for quite a long time...

You're right, and anyone buying a house today is banking on them staying low. But what other option do they have?

If interest rates go up to 6-7-8%...double digits, the housing market would be a bloodbath.

It certainly would be, though it seems the Fed is committed to keeping rates low in perpetuity.

It's possible we hit a point where inflation ticks up due to recent stimulus/printing, and the Fed is forced to raise rates suddenly. The recent change to allow inflation to run past 2% indicates they're likely to let it run for a bit, though.

If interest rates go up 6-7-8%, inflation would give most people an almost free house. Rent it out instead of selling and you have income for life.

Eventually, but salaries tend to lag inflation. Also would depend how quickly rates went up.

Depends on your job. Professional/managerial salaries often lead inflation - if you're a financier, engineer, consutant, or CEO you've been raking it in over the last decade. Public servants, service & factory workers, and other commodity jobs lag inflation.

My mom was a teacher and said that when she graduated in college (late 60s), teacher salaries were maybe 20-30% below engineer/lawyer/professor salaries. By the time I was born (early 80s) her classmates in those professions were making 3x what she was.

Happened in 1981:

Mortgage rates: https://themortgagereports.com/61853/30-year-mortgage-rates-...

Housing prices: https://inflationdata.com/articles/inflation-adjusted-prices...

Inflation-adjusted housing prices went down about 20%. Nominal home prices basically stayed constant for about 2 years, then resumed marching upwards.

Also note that the actual bloodbath happened from 2006-2012 (when the housing crash took prices down about 35%). It does not correspond to any major increase in interest rates. The primary driver seems to be foreclosures, which in turn was driven by ARMs and poor lending standards. Conclusion might be that interest rates just don't matter that much as long as a majority of people are on fixed-rate mortgages, while they can matter a lot if folks are on ARMs they can't afford. (Interestingly, we may get a similar crash of multi-family housing in the near future, since all the tenants not paying rent now is having a similar effect on mortgages.)

A low interest mortgage has a longer duration which means the probability is much higher.

Here in the U. S., specifically WA state, the shorter the mortgage, the lower the interest rate. For example, when we refinanced we could get 15 years @ 2.5% or 30 years @ 3%. In that case, the "low interest mortgage" was the 15 year mortgage.

So either one of us has some miscommunication, or things are different where you live.

Some places a starter apartment is $25000, and you can work remotely as a developer earning, say, $4000 a month net. It's just hard to wrap my head around 20 year mortgage.

In that position you don't need a mortgage. That's quite simple.

On the other hand, where I live a reasonable small house is £150,000 and senior developer wages are about £30,000 (net). People need mortgages.

and where I live, a "starter apartment" is €300000 and senior people might get €60000. A house? Well, starting at €1.2M I guess.

What you suggest here applies to 0.01% of any country's population. But yes,I'd love to have my London salary back in my own country.

Reply on news.ycombinator.com