The 30-Year Mortgage Is an Intrinsically Toxic Product (2019)
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I would argue expensive single family homes in supply restricted markets is a toxic product
Many people who aren’t buying are really just trying to time the market, it’s not because they can’t put a down payment. No one wants to be caught bag holding a house that may be worth a lot less in a few years.
Which brings up another piece of "conventional" homebuying: the need for a 20% down payment. Many Americans are still taught this magic number, but the reality in many big cities is that you won't always be able to afford that amount.
Think about the externalities, the fed prints money whenever the economy is in trouble and needs help (ex: recession, pandemic), this money is to be well invested for growth (real state, stocks, etc.): this injection/debt engenders more jobs, construction, population and demand growth. As long as this last part is done right [more money supply = more production] the economy will be kept healthy.
The problem arises when the above equation does not balance out- ex: Argentina, Greece, Turkey, etc. (i.e. crypto arguments), when people and governments do not produce to justify that investment (aka corruption and stealing).
Money's purpose is to be used for growth, so unlike the popular view of "inflating fiat steals your money", I don't think people understand money's purpose in the 1st place.
Except for artificially supply restricted markets (ex: single family zoning in California [recently abolished] or money laundering on empty homes in Canada, UK & Australia), mortgages are not intrinsically toxic.
But the question is of course is a mortgage seen as someone "paying off" a house, or simply a rent to the bank? I never intended to purchase/repay my house. The 100 year home loan is how I rent and the bank is my landlord. I take a lot of the risk for changes in the market, but also obviously the reward too (unlike a normal rental setup).
I do pay it back (1/100 per year) but obviously my horizon for living in the home isn't 100 years. It's both in mine and my banks interest that my mortgage is kept at some level which is less than "one bad dip below market value", or say 2/3 or 12 of current market value. Once there, I'd rather invest the money than pay back more on the mortgage. Especially if interest rates are (a deductible) 1.5% and low risk investment yields several times that!
Remember though, for a big part of the US, paying off your mortgage is the most important / biggest form of retirement savings. Many people make it their goal to pay off their mortgage before they retire, even if their 401k is dry. With social security and modest lifestyle, it's not a terrible decision. You can even reverse mortgage if the well runs dry a few years early..
Because at the end of the day it doesn't really matter whether it's 1/30 of a 30yr mortgage or 1/100 of a 100yr mortgage, that amount will be exactly what the buyer can afford. So after 30 years I'll have a home with around 1/2 a mortgage remaining. And saving a massive slump in prices, that will be a big part of my retirement savings. Having a completely paid off 30yr mortgage would be even better of course, but not hugely so. The amount left as "savings" is still the same. The longer mortgage just holds a larger risk/reward of passive income vs loss.
One thing I did not expect is how many banks have waived the 20% down payment rule. If you pay some mortgage insurance you can buy a home with less than 20%. I have talked with people who managed to ante up 20%, and some who bought without 20% down.
In light of the not-so-distant 2008 subprime mortgage bailout, some of what is happening surprised me a little. Obviously, that this is happening would have the tendency to inflate real estate prices.
That would really surprise me. Everyone I know talks about how much cheaper it would be to buy if only they could afford the deposit.
Most of the time the mortgage is lower than the rent for the obvious reason that when you rent you're both paying the landlord's mortgage, plus their profit.
True, of course. But you are also paying the landlord's property taxes and maintenance costs and (sometimes) utilities and....
A pet peeve of mine is when people compare mortgage payments to rent payments as if they are a equivalent. There is a lot of additional overhead in homeownership beyond the mortgage payment.
Though maybe it's a sore point for me because my furnace died this morning and it's -40 outside so guess who gets to drop an unplanned $6k this week?
Which you pay via your rent as well, as your landlord is also paying those overheads.
When you rent you're paying everything you pay when you own... plus profit for someone else.
Well, possible profit. There is risk involved. Underwater mortgages are totally a thing.
More recently, a fair number of landlords are in trouble right now due to the COVID eviction pause. Their tenants stopped paying, but their own principal, interest, and insurance payments kept going clickety-clickety-click. Some of them are even walking away from the properties.
It's also important for everyone to keep in mind that not everywhere is the Bay Area, or even California. Judging nationwide housing conditions by the conditions in those regions is likely a mistake.
The problem is that there is a tendency for people to compare the rent payment directly to only the mortgage payment.
Whether or not the fully burdened mortgage is less than the rent depends on the region but it is not uncommon for the costs of owning to be higher than the costs of renting, and this still makes sense for the landlord because of differences in cost basis.
Rent is just a little bit of gravy to partly offset the cost of owning those appreciating assets. It's not the point.
This is absolutely false. Many people have sold at a lost over the years for many reason including job relocation, family issues, bankruptcy, etc et etc
That said Pricing going down != loss, for example I bought my current home 5 years ago, I bought it below market value, and after 5 years of value increases prices would have to drop more than 20% for me to sell it for less than I paid for it, and much more to "take a loss" if you calculate profit / loss properly factoring the value of shelter provided (which no one does)
>>People treat their house as a retirement fund, or just an investment.
That is a problem society has yes...
The more important point is that in a supply-constrained situation, there isn't really going to be a "buy the dip" moment. Most home owners that are under water are under no pressure to sell, yet buyers are on the clock.
You may not recognize it as such, but the idea that you always sell to the highest bidder is an expression of a very specific sort of "morality", one that excludes a more wholistic conception of what property ownership means for society as a whole, as well as the individuals who make it up.
I understand that "the market sets the price" is a widely accepted dogma after 30-40 years of neoliberal messaging in every part of the US, UK and significant chunks of the rest of the world, but it's not actually natural law (to the extent that more or less nothign is natural law).
The very people complaining about being locked out of the housing market, being a victim of market conditions, would instantly forget about any and all morality as soon as they do secure a house. They'd absolutely not sell their house at a discount.
When they preach "accessible housing", they mean accessible to them. When their houses appreciate in price just for the sake of owning it, I would know of nobody saying: I didn't deserve this, I'm going to wire this money to charity or back to the government.
There is no morality in markets. Whilst as owner you may benefit, in times that you do not (economic crisis, expensive repairs, personal problems like divorce or disability)...absolutely nobody comes to your rescue.
Morals and markets do not go together.
I remember in Seattle in the mid-90s just as the housing market there was starting to take off hearing a radio talk show where someone was complaining about Californians coming to WA and "ruining things" by bidding up housing costs. The host pointed out that it takes two to tango, and that the sellers were just as implicated in the process as the buyers. The caller got very flustered and then said "well, yeah, but it would be un-American to accept anything except the highest price".
Sigh.
This is not true. For example, the Romans used to use a cost-plus pricing scheme, and were apparently alarmed/surprised by the negotiations that they saw in Arab markets.
Now if they oppose broader reform that could actually have positive effects, that’s a more appropriate and nuanced question.
If you accept a low bid, you open yourself up to claims of discrimination against one or more protected classes.
I dont blame a seller for trying to sell at maximum price they can get, I am blaming the system we have created to puts monthly payments, and long term debt as the focus of purchase instead of the cost of the thing being sold.
Cars are the same way, we know how Pickup Trucks that cost $100,000 why because financing as allowed them to cost that because the banks will loan now almost 10 years to finance a new truck
College is the same way. Debt financing allows the prices to raise at rate far removed from inflation, with out that sellers would need to find way to cut costs and offer their goods are more affordable prices.
My Problem is with our current system of Life Long Debt.
I'm also a little worried about putting a lot down because prices might go down when interest rates go up.
I realize this isn't normal. Most people are somewhere cheaper, lots are married, and most have nowhere near as much cash.
Are you sure this is true? In my (admittedly limited) experience, the way it works is that the bank asks for your annual income and you have to provide proof of that, which you can do by providing a statement from the brokerage account your company vests your RSUs to. RSUs issued from your (presumably publicly traded) company are liquid, so you can pretty easily claim them as part of your annual income and get a mortgage against that income.
You just need a document from your employer demonstrating to the bank what they are intending to pay you per year in total compensation, including both salary and RSU stock. Also get some documents from your stock broker showing how many RSU's you have vested so far versus ones that are scheduled to vest over the next X years.
For a bonus: rather than liquidating all your vested RSU's for the downpayment, hold onto a good number of RSU's in your brokerage account as these can be used to show you are holding assets, which can help you get a lower mortgage rate as well. Banks love to see that you have assets you are holding onto and can liquidate just in case you do need cash. Their ideal customer is someone who can technically buy a house in cash, but is only applying for the mortgage because the mortgage rates are currently lower than the stock return rates.
Chances are if you work at FAANG and have RSU's that's actually considered a very safe loan that you are basically guaranteed to be approved for at a very nice low mortgage rate. You'll be able to get approved by multiple banks, and then get them to compete with each other to lower their rates by fractions of a percent to try to win your mortgage agreement. Mortgage brokers are your friends here, pay one to do the hard work of contacting the banks on your behalf and make sure your documents look good and then the banks will be falling over themselves to give you a loan.
Would they really care if the asset is cash or stocks?
> very nice low mortgage rate
True, and my credit score is higher than 760, so banks love me.
You would think not, but I suspect that the process, or the people involved in the process, see a good amount of assets in stocks as an indicator of a more financially savvy applicant, which theoretically translates to a safer mortgage. Having a large amount of cash is ironically a bit suspicious looking as well. It is normal for banks to ask for many months of bank statements to verify that the cash is actually yours, and you aren't just temporarily holding onto it for someone else, or got a big transfer from parents / friends that you need to pay back. With stocks it is easy to see that you have had this asset for a while, so they can trust that it is actually yours.
Makes me nervous that I won't qualify for a low mortgage rate right as the Fed is likely to start raising interest rates again (further chilling my enthusiasm to buy).
Now the thing to consider, is how much to put down vs how much of your down payment you should invest. With rates so low, it seems better to invest the down payment in the stock market and putting the minimum in the house.
> With rates so low, it seems better to invest the down payment in the stock market and putting the minimum in the house.
I'd agree that it'd be better to put the minimum possible down, but remember that I'm limited by my salary, not my down payment, so I'm expecting 40% down so I can afford something nicer. I also think that stocks have done will because there's no alternative, and people buy the most expensive home they can afford the mortgage for, so if interest rates go up, both stocks and real estate will go down (or up less quickly).
Get married, move to a cheaper place - remote work is all the rage now after all - and use that cash to buy some real estate without the need for any mortgage (in this order or the other way around, your choice). You'll gain the financial security of having your own home, the social security of having a family and the freedom to explore whatever befits you. Who cares what interest rates or housing prices do, you're not affected by either.
Source: I more or less did this and have never looked back with regret.
By which you actually mean "prices come down to earth," which is a good thing, just one that many powerful interests don't want to happen because they have bet against it.
The solution, as with the original problem is to build more housing.
What you need to do is remove the dead weight from the market: i.e. do things to reduce investors and mortgage writers siphoning money out of the economy. What this means is smaller, shorter term loans and taxes on commercial real estate lending and leased land and housing.
It's also totally freakin' nuts.
I assume they let us do this because we purchased below our “max budget” - so even if we took a pay cut, paying the mortgage would still be feasible.
2 of many factors that contributed to the lending crisis in 2008 aren’t necessarily a factor: the first being extremely relaxed lending standards (as in people with no real verifiable income getting loans) and the second being the proliferation of ARMs. My understanding is standards tightened during the pandemic but I could be wrong.
In my country, the price of real estate appreciated by 20% in a single year. Wages are likely negative given the high inflation. On a longer time period of 25 years, houses have tripled in price, yet wages have not.
So whilst the percentage stays the same, the absolute value of the down payment grows out of control and is no longer affordable.
The way I describe this is that you constantly have a short position on the local real estate market. If rents go up, you lose. If house prices go up, you lose. If either goes down, you win. That's a short position.
So I view buying real estate as essentially canceling out your short position. Think about it: if the local market moves, it largely doesn't affect you. You can argue if you're underwater, it's bad. It's not good but your actual liability tends to be limited, particularly in no recourse states. For those unfamiliar, no recourse states give the lender the option to foreclose on the property if it's in default or to go after you for the debt. They can't do both.
The author claims mortgages trap the poor in bad investments. The counterargument to that is you give stability to those who are most likely to be priced out by rent hikes and forced to move. Efforts to avoid that (eg rent control) don't really solve anything and just create the same problems that incumbent home ownership does: first come, first served.
The author bemoans the lack of labour market flexibility with higher home ownership. This is true but is it bad? You have to remember he's talking about the 1930s when people were destitute and were forced to chase work. Should this really be a policy goal?
The lack of the 30 year mortgage would likely disproportionately affect poor people.
Real estate does need reform. I think we need to stop allowing funds and the super-rich to park money in real estate. Cities should be for those who live in the city, not Russian oligarchs who are anonymously "investing" via a REIT. We also need to stop subsidizing ultra-luxury building as happens in NYC (eg 421a abatements).
But the 30 year mortgage? This feels like an attack on the most economically vulnerable to me.
EDIT: corrected "negative short" to "short".
Buying real estate doesn't exactly "cancel out" your negative short position. On a long enough time horizon everyone who buys a house will end up selling it. Plus buying a house requires you to take money out of other investments, like stocks.
The real problems, in my opinion, are (1) people go all-in for their "forever home" only to discover most people don't stay that long, and (2) people view themselves as owners rather than future sellers. Understand your house is a leveraged investment and you'll do well.
so a 'house' is 'someone else's Home that you happen to profit from heavily'?
Instead, we bought a house that isn't perfect for our needs but will be easy to sell, because it has multiple in-demand features that don't really matter much to us, but matter to a large swath of buyers.
Perfect example is a childless couple who can buy a house in either a good or bad school district, with commensurate taxes and property values. They might think they're getting a steal by going with the house in the bad district... until it's their turn to sell the house.
Use this kind of stylus and don't pick a fight with the Babylonians may have been great advice, even if it wasn't eternal.
ugh there's truth to this but it just feels so fucking dystopic. within the current systems we're playing games of musical chairs and the people who do not 'win' have further and further to fall when they inevitably 'lose' due to rising inequality/increasing exploitation (gig economy/zero-hour-ing, union-busting etc.)
i use quotes because nobody really wins when one of us loses. we have enough to satisfy the needs of every human.
> 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.
It's life for a lot of people.
Here in the UK, many renter families have no choice but to do that their whole life, with the added indignity that they don't decide when it's time to move, the landlord decides at short notice (either by unaffordable rent hikes or no-reason evictions (which are often for renovation rhen hikes too)).
Sometimes they don't know which area they will be moving to, when that happens, because they will be unable to stay in a familiar area as local rents rise collectively and what they can afford gets progressively worse, until one day they can't find anywhere local at all within the notice period.
So sometimes the children have to move schools as well at short notice.
I think stability is the main reason first time buyers want to buy in the UK, and that option is closed to many.
By now, we have an increasing number of people approaching retirement who are still involuntarily renting, and it's the leading edge of a very large demographic wave of people in that position. I worry about those because rents are getting to be higher than their entire pension will be, and government housing support is insufficient to make up the difference.
It certainly could be. We homeschool, the kids enjoy the adventure, and I've taught them how to make money along the way.
> And unless you are moving to a lower COL...
The trick is to be selective in the houses you buy and use some of the money to buy a nicer house next time. We look for up-and-coming parts of our local area that haven't been fully discovered, then sell when the frenzy hits the area.
Sigh.
We just bought a new house... hopefully you haven't.
Your primary house is not an investment, because if you sell it you are now homeless. This is literally the first thing any RIA or CFPA teaches you.
A paid off house gives you a type of stability, belonging and security that rentals don't generally offer (at the expense of flexibility and mobility). I'm not trying to say that owning is better than renting, just that they are different enough for the "buying your house isn't an investment" statement to be mostly true.
True, but calling renters "homeless" would be ridiculous.
Unfortunately I think people have forgotten what an investment really is. An investment is just a capital allocation. It's not about buying now and then selling later for profit. That's called speculation. A good investment will continue to deliver value over time. A house literally keeps you alive. Of course it's an investment.
My aunt and uncle got into a pickle with this in the 80s. They were over-leveraged and underwater in a house in North Jersey. The house value crashed in the late 80s and their arm was going up a few points a year. My uncle was a bank officer and would lose his job if they went bankrupt. The job moved and he was forced to commute to some awful place without usury for a few years. It worked out in the long term but it was very difficult.
It’s hard for the average Joe to treat home like an investment. Timing is everything with investments and you always need a home.
In the center, there’s the interest rate, where the first group claims needs to stay low so they can win/survive, but if it does, the second group loses.
If you are spending a lot of money on an asset, it always has to include some analysis on investment because you always have the option to not buy and put that money on a productive investment instead.
It's not a supply problem, it's a demand problem. Everybody want to live in the same dense hotspots, creating a perpetual upward pressure in local prices.
Not even the most powerful instrument, interest rates, solve this problem. You only need as many buyers as there is supply. It doesn't matter if 99% can't afford it, if 1% is enough to buy up the limited supply of houses, no matter the interest rate.
Not even a massive economic crash brings relief. Because the underlying demand is still there, and so is the limited supply. The temporary discount is usually not used (scared buyers) and most home owners just sit it out until prices inevitably come back. There isn't going to be a "houses now 50% off" moment, ever.
You can win a battle against NIMBY but it won't win the war. The demand keeps coming and supply cannot sustainably keep up.
Hence my simple take. You're trying to squeeze an infinite amount of people and buildings into a tiny space that is not infinite. Instead of doubling down on this idiotic idea, reorganize society.
There isn't going to be a "tweak" that fixes it. It cannot be fixed with this line of thinking. It requires new thinking.
Is that the bug, or the feature?
What have I done wrong in my life so I can no longer understand news articles?
Cf https://quant.stackexchange.com/questions/39619/gamma-pnl-vs...
If the sentence doesn’t make sense, that’s arguable part of the point: the author wants you to react, “huh, average people don’t think like that, so of course that’s not a rational bet”, which is his point.
But if you want to understand the volatility/gamma dynamic and strategy the author is referring to, this gives some detail. I’ll summarize it myself once I catch up and feel I understand it.
https://seekingalpha.com/article/181382-option-strategy-long...
However, something has to put the breaks on rising house costs like OP says, or we're heading back to pre-1930's where 60% of the population rented.
OP is right, 30 year mortgages are a way to increase prices, like what's happening in car loans: 48 month used to be the norm (80's, 90's), but now I've seen 120 month loans. 10 years to pay off a car. Yeesh.
Mortgage deduction elimination for non-primary residences is a start: that's gov't subsidy of investors. Once mortgage interest rates go back above 6% that might at least flatline prices instead of this crazy exponential.
Also the ability to refinance the loan can allow a person to take advantage of equity to either purchase additional properties or reduce their monthly dues. If the property is rented this can be the difference between the property requiring funds every month to one that makes the owner money every month - at which point it really doesn't matter what the duration of the loan is, because it's now producing income.
Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.
It used to be that ARMs would have a "teaser" rate for that first period, which made them make sense to take out for some circumstances. Now, fixed rates dominate because the ARM rates aren't much lower than the fixed rates.
These products are lower-earners, but there is limited exposure to risk.
But that's the point, isn't it? If the rare few benefit, and the vast majority do not, then the promise isn't a promise. It's a lie.
Put another way, the system shouldn't be arranged and aligned in such that - as cliche as it is - the rich get richer, and the rest suffer.
A 30 year loan paid off over a 30 year period is a waste of the product - one is not supposed to set it and forget it, doing that optimises the lender's profit much like paying off a credit card at the minimum rate or never checking if one's internet/phone/utility plans have become more competitive (check those annually.)
Here are typical ways that a 30 year loan is used to enhance a person's financial position:
1. If the property value has increased, the loan can be refinanced to extract this equity as cash for investments that outpace the mortgage rate. Thus a person is immediately earning passive income which can be used to reduce their mortgage or other regular expenses.
2. Competition between lenders produces competitive rates. One can take advantage of lower rates in order to either reduce their out-goings or pay off their loan sooner (thus reducing their interest.)
3. A person can take advantage of the rental market. For example a couple may rent a smaller property after their children leave the nest, while renting out their family home. The function here is that they can remortgage their property over another 30 year duration, thus they begin to earn income from the property rather than having the property cost them money. (The loan duration is less important when the property is earning you money.)
A common mindset of people is that they don't want a mortgage hanging over their head they want to "own" the property and have no "debt" - but financially savvy people will utilise their properties for wealth generation by having "debt". This means if their property is paid off, they would still mortgage it to the bank in order to obtain funds which are used in higher-interest investments, producing a passive income.
Note if you are in good standing, you can walk into a bank and take out a personal loan - then use that loan to procure an investment portfolio which earns more than the repayments. Yes you own the risk, but it's a method to obtain instant passive income, and it's not difficult to invest in solid earners (some banks will even have this as a product, although it tends to be less competitive.)
I'm a bit more risk adverse but each person has a level of risk that works for them.
I could pay off my mortgage at any time, but I've earned more by putting that cash in equities.
I treat my 30 yr mortgage like a low interest loan. I basically take the risk that the mortgage lender doesn't want.
If I pay off my mortgage I can afford to take on more risk in the market. I can afford to attempt entrepreneurship.
It took me a long time to get to the point where I truly believed it was worth attacking my mortgage.
I prefer to have as little debt as possible for my own peace.
It's possible for me to get totally debt free in a year or two. Then I can focus on building a portfolio for retirement.
I'm also choosing to remain in my first house and not spend lots on my standard of living.
The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)
All this garbage is pointlessly complex. Pricing owership is needlessly complex. Rent all the way down to dividends at the bottom, please.