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Comment by Mc91 | Hacker News Reader

I normally don't talk to people much about real estate, house prices, mortgages etc., but the local real estate market has heated up a little so I have been talking about these things with people more.

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.

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Most young people don't earn even close to enough to save 20% of the cost of a house. Without those people (first time buyers) entering the market the entire market grinds to a halt as there's no one to buy on one end of a chain. The bank's mortgage businesses would collapse. They had to start offering alternatives to down payments.

How can it be that they earn enough to make the monthly payments, then?

They're already paying more than that much in rent. They just can't put together that and 20% of the full (greatly inflated) valuation at the same time.

Where? In the expensive coastal markets the price to rent ratio is enormous; the mortgage is much higher than the rent on the same home.

A lot of the UK

> the mortgage is much higher than the rent on the same home

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.

> 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?

> There is a lot of additional overhead in homeownership beyond the mortgage payment.

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.

> 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.

Yes, that's what I just said.

The problem is that there is a tendency for people to compare the rent payment directly to only the mortgage payment.

Many landlords do not have a mortgage. Or if they do, the cost basis is much lower than if you bought the same place today. Also, there are major costs to owning home beyond the mortgage. To use myself as an example, only ~60% of my ownership costs are the actual mortgage.

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.

A long-tenured landlord made some money in his role as a speculator, and currently has it invested as equity in the property. Which, yes, gives him a lower mortgage payment than you would face. This $X invested in the property is yielding him $Y in marginal cash flow per month. You can do that too, assuming you have $X, by paying extra towards your own mortgage. But do you want to? Depends on the value of $X and $Y; you may be better off buying index funds.

It is surprising, and counterintuitive. In the "hot," high price to rent ratio cities (NYC, BOS, DC, LA, SF, SEA, etc) landlords don't make money in their capacity as landlords, but as speculators.

Rent is just a little bit of gravy to partly offset the cost of owning those appreciating assets. It's not the point.

That makes no sense at all. Nobody would buy in that scenario and for the landlord the return is negative, so they wouldn't buy either.

Property appreciation can make renting below the mortgage payment financially attractive. A house that's appreciating 5% per year is covering for a lot of negative cash flow.

Well, they're probably paying rent before buying. And in many places in the country a monthly mortgage plus tax and insurance payment comes out well under rent.

Historically low interest rates. Also, the average percentage of household income allocated towards housing has been steadily increasing.

Oh they earn enough to make monthly payments. They just happen to be paying someone else's mortgage, rather than their own.

I can see this being true in some markets, but the places where we talk about house prices going crazy, they are doing so not just in absolute terms but in proportion to rents.

This often ignores the cost of council rates, insurance, loan interest, etc. You need to be able to afford more than just rent to own. But if the bank approves you, it’s likely right because they don’t want to give loans that people can’t afford.

No, it's pretty common that people end up paying more in rent than they would for a mortgage. You could maybe argue that the job security is what is priced into this, but it happens to working professionals too.

No, with out those buyers the market could not support the MASSIVE increase in prices many multiples of inflation in some markets, they "HAD" to start offering alternatives or sellers would have to seek only reasonable profits on the sell instead of exorbitant profits... the horror

People treat their house as a retirement fund, or just an investment. They won't sell at a loss. If prices go down they just won't sell, which would also make it impossible for bank's to sell mortgages to people buying. Buyers can't buy if there are no sellers. People have to keep buying houses forever or the banking system will fail.

>>They won't sell at a loss. If prices go down they just won't sell,

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...

I sold my previous house at a substantial loss.

The moral preaching is out of place. When you own a home and are selling it, you go for the highest bidder. The idea that anybody at all would give a politically motivated discount is naive.

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.

> The moral preaching is out of place. When you own a home and are selling it, you go for the highest bidder.

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).

For someone selling what is likely by far the most expensive thing they own, they're pretty likely to take the highest price offer (or a near highest price iff that under-bidder is significantly more certain to close [waiving contingencies, etc.])

I totally get what you're saying, but in particular I protest against moral hypocrisy.

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.

Sure, the hypocrisy is a problem.

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.

Since the moment humans traded commercially, getting the highest price for anything has been the norm. So I wouldn't call it an American thing and also not a neoliberal thing. It's basic commerce.

> getting the highest price for anything has been the norm

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.

That I did not know. I don't think it entirely overrules my point, but it's a good counter nevertheless.

I don’t think this is quite fair. Just because someone recognizes a major systemic problem such as spiraling housing prices doesn’t obligate them to unilaterally decline their personal gains on a moral basis, especially because that will achieve nothing in terms of rectifying the situation.

Now if they oppose broader reform that could actually have positive effects, that’s a more appropriate and nuanced question.

>the idea that you always sell to the highest bidder is an expression of a very specific sort of "morality"

If you accept a low bid, you open yourself up to claims of discrimination against one or more protected classes.

it is not really moral preaching, nor it is a statement on the buyers. I it is a condemnation of the system we have created (largely due to government regulations)

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 in a bizarre place financially. I'm single, in the Bay Area, and work for a FAANG. I have enough saved for 40+% down for a lot of decent things, so I'm limited by my salary, not my down payment. It's extra weird because RSUs don't necessarily count towards salary for mortgage purposes, but they're (for now) a significant chunk of my net pay.

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.

> It's extra weird because RSUs don't necessarily count towards salary for mortgage purposes, but they're (for now) a significant chunk of my net pay.

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.

It did with one lender I talked to (Rocket Mortgage). I'll check with another (probably First Republic).

This depends a lot on the bank, most of them are glad to use stock as part of the income calculation so long as you have a history of vesting a certain amount over time. It works the same way as bonuses or commissions, if you want variable income to count toward your DTI you need to demonstrate you get it regularly.

RSU's absolutely do count for income for mortgage purposes. (Source: I've bought a house recently and my RSU's were accepted as part of my income). It's different if you work at a startup, where the stocks are not yet publicly traded, but if you are working at FAANG it is publicly traded, then the stock is quite liquid, so banks consider those RSU's to be as good as dollars.

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.

> hold onto a good number of RSU's in your brokerage account as these can be used to show you are holding assets

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.

> Would they really care if the asset is cash or stocks?

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.

A bit OT, but this is my current dilemma. My entire career has been with startups so I effectively value any equity at $0 (none have made an exit). That means all my assets are cash/stock, since I've rented my whole life.

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).

I'm trying to understand your comment about not putting a large down payment in case prices go down. Whether you buy or not is really the only thing that matters if you think the price will go down.

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.

The amount down changes if I'm playing with my money or they bank's. There's a cutoff where you can default on the home, wreck your credit, but if you have enough in the bank to buy a replacement, come out ahead.

> 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).

> I'm also a little worried about putting a lot down because prices might go down when interest rates go up.

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.

> the entire market grinds to a halt

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.

No the entry-level end would just switch to a rental market. Those already in the market can afford to buy up starter homes as rental properties. Those not yet on the ladder would get locked out as eternal renters.

The solution, as with the original problem is to build more housing.

What it seems like is house pricing adjusts to be affordable for a similar number of people regardless of what you do. Give people bigger, longer term loans and you don’t give more people access, you just make prices higher.

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.

In the UK, one part of the (insane) government response to this stagnation of new buyers entering the market has been to start adding absurd schemes such as partial-buy-plus-rent-to-buy, in which the "buyers" only own/mortgage part of the property, pay rent on the other part, and accrue some level (not necessarily very much) of credit to reduce the cost of buying the rented part should they ever decide to do this. It reduces the down payment cost substantially, but doesn't change the monthly payments much at all.

It's also totally freakin' nuts.

The ability to pass less than 20% with PMI has been a thing for a long time... It was around before the 2008 crash and never went away afterwards. The bar to qualify for a mortgage went up, and has come back down some (though not all the way to pre-2008 levels), but PMI didn't really change AFAIK.

I had a mortgage that had PMI for a time in the late 90s. (I could have afforded 20% but then I couldn't have afforded a bunch of improvements which the fixer-upper really needed.)

The problem with a percentage-based down payment is that wages do not keep up with the housing market.

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.

Eh, we purchased a home (a fixer-upper) at 10% down and put that cash towards improving it. We had to pay a modest amount of PMI (about $85/month). Refinanced it 3 years later; new assessed value put us over 20% equity and we no longer had to carry it.

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.

When we bought, we had enough for 15% down but could not reach 20%. Since we had to get mortgage insurance anyway, we were advised to just put 5% down and hold back the rest to cover moving expenses and setup for a new house. 5 years later we had paid off enough to refinance at a lower rate, shorter term, and without the PMI.

There have been mortgage products with less than 20% down for a long time now. I bought a house in 2016 for 3.5% down, I had at least 3 separate lenders give me a loan estimate with those terms.

I just bought with 5% down, though I have good credit and income.

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