Mortgages seem to have some pretty nice features. They help encourage people to invest some of their income into an asset that generally appreciates rather than spend it all. It aligns incentives around upkeep and investment in the neighborhood and community. They offset some of the negatives of inflation.
The modern world of people moving and upgrading every 5-10 years has really changed this dynamic for the negative.
“take care of your local community” and “[preserve] the status quo” are placed in fairly direct opposition often in daily life. unless you want for children to live in the home they were born in forever, no new infrastructure to be built, etc. who really wants the status quo anywhere to be maintained for 30 years? most people i know, most communities i’m involved in, crave more novelty than that.
Relatively slow improvements to living conditions are fine, as that does not cause massive disruption for the average citizen and does not threaten whichever groups are in power.
In the US (and probably most places) a house is the most expensive asset that a person will own throughout their life.
It is reasonable to ask if a person's life would be better if they were able to extract some of the value from the house in exchange for other things. For example, I can borrow against the value of my home and afford to go on more vacations, or a nicer car. It could fund my retirement, even.
Another way of looking at it is as a component of an overall portfolio. Does it make sense for me to have 80% of my net worth in real estate when I can get a 30 year loan at 2% or 3% and diversify? HELOCs are another commonly used instrument.
I suppose some may argue that a few of the things I've mentioned are "irresponsible", but the truth is that it varies from person to person. When used intelligently, debt like this can be a win for both parties.
Isn't this a reverse mortgage?
https://www.medicaidplanningassistance.org/medicaid-look-bac...
California is also phasing out the asset test, which will eliminate the need for a look-back period entirely (asset limit moving from $2k/$3k for individual/couple to $130k/$195k this July, planned for total elimination by July 2024.)
In most states, your home is exempt (at least to certain far above median value, equity limit) from the Medicaid asset test, so, no, you probably won't.
Older families should strongly consider placing their home into some kind of trust or transferring ownership to a descendant before this becomes an issue.
>> certain Medicaid benefits
You get charged $5K/month until you are broke. Then Medicare pays the place 1/3 that price for the same care.
Largest wealth confiscation scheme ever seen. Inheritance? No, sorry.
Medicaid is for the destitute so of course you need to spend down assets to access it.
You really want to have a plan for your primary home before this becomes an issue. The asset test is only one concern.
A common use for such a loan is to pay for renovations, which can further increase the value of a property. Another typical use is "home grown leverage" i.e. using a home equity loan to pay for some investment, which is commonly done with rental properties (often to make the down payment on another mortgage; the hope being that you can collect enough in rent to have money left over after making monthly loan payments). For a truly US-only use-case, people sometimes wind up having to use a home equity loan to cover medical bills after a major emergency or accident, though I think this was more common before the Affordable Care Act and will probably become even less common with surprise billing being mostly eliminated.
Edit: now that I think about it. The first level is just buying house with cash immediately. The mortgage is the next level of complexity, adding time dimension. The article is about the 3rd level complexity above that (securitization of the 2nd level)! Turtles all the way down.
US home owners use mortgages for the same purpose as people in other countries... to be able to pay off their home over time. How is it any different as a home owner in the US verse the rest of the world?
Assuming the standard US fixed 30 year mortgage, it mattered quite a bit. Their final payment was on relative terms, much less than their first payment. This effect over time made your grand parents wealthier by having one of the most expensive parts of living (housing) somewhat sheltered from inflation (taxes and upkeep not withstanding).
I live in a popular location, and the house next door just rented for 2.5x what I pay on my 10 year old mortgage. I like where I live and don't plan on selling, but the price I locked in years ago has absolutely mattered to my life.
And if it is worth $100B, would it still be irrelevant? Would they still live in it, instead of selling and becoming mega rich billionaires?
Be thankful that it didn't. But if they have full ownership, if all their other retirement savings went away, the equity of the home could be leveraged for living expenses:
> This is an “if all else fails” enhancement that Vettese (and I) hope will not prove necessary. For many Canadians with substantial home equity, it’s nice to know that in a worst-case scenario, your home equity can be tapped. But, Vettese warns, “it should only be used to provide necessary income, not to enhance one’s lifestyle.” He also says it should not be considered until age 75. He notes that a reverse mortgage typically involves about 180 basis points higher than a HELOC would charge.
* https://findependencehub.com/retired-money-boost-retirement-...
If someone lives long enough that they are no longer able to take care of themselves, and it is not possible for them to live with family, then the equity could be used for paying for an assisted long-term elderly care facility.
If the price of your house increases, the price of the better one increases even more. You can switch it if you saved or if you life improved. The price increase doesn't help, it hinders that change.
The way I’ve seen markets move is that certain price bands are more susceptible to fluctuations than others. For example, over the course of a 4 year period you might see the entry point for the market go from $400k to $500k, while the $500-$600k band sees a 30% increase, the $700-$800 band sees a 20% increase, and the $900-$1m sees a 10% increase.
So while the entire market is moving up, certain bands become more affordable if you can capitalize on a higher percentage band.
One of the big advantages of a system like the US (unlike, say, Japan, where homes are a depreciating asset) is that it increases mobility. If your home is worth less than the day you moved in, you're kind of stuck there -- every move represents a capital outlay that is just going to evaporate over time. In the US system, a home is a little like a fixed-income asset. Even if it only appreciates at the rate of inflation, you can treat it as a stable store of wealth.
Even if you purchase one home in your entire life, it's still a positive in this system. As others have pointed out already, you can borrow against that wealth, or, in the case of your grandparents, pass it down to heirs. Accumulating wealth is better than not accumulating wealth.
On the majority of lots in most cities it's very difficult (or illegal) to build new housing. That's a regulatory constraint that has nothing to do with how the house is financed.
Even if you never use it as an asset in your life, it is still an asset.
It seems TFA doesn't address commercial mortgages at all.
Depends on the way the financial sector works where they live; in the US, if they ever applied for credit for anything while owning the house, it, and their debt:asset ratio, probably would have played a role in the terms they were offered, and that may have been largely transparent to them, because a lot of the information flow supporting that decision doesn't go through the people applying.
If you have 1m equity, you could for example take out 500k at 3% interest and buy a dividend stock paying 6% and effectively double your yield on that equity (plus added risk from the debt, though).
Or use the equity to buy a rental property.
But most people aren't too finance savvy so you're right that it may not affect them in practice.
Just curious, what dividend stock do you think will pay you 6% without very high risk?
The closest I can think of to what you're describing is BP stock but with the recent rise isn't hitting 6% anymore. (I-Bonds are capped at 10k + 5k per year and typically aren't that high.)
Owning makes you responsible for things beyond your control. If the factory in your town closes, you're underwater no matter how smart you were about picking it or diligent you were about maintaining the house.
Similarly you can't really do what you want with it. You better keep it cream and beige coloured! And that's all you can buy. No one builds small homes or castles. Just identical units. Everyone must have a lawn, it must be one of three shades of green and cut correctly etc.
It also forces you to care about things you don't really care about: you have no problem with minorities living next door, but what if it effects your house price? The same for infrastructure your town needs. You know we need a free medical clinic but what if poor people hang around when you're showing the place?
It has the same effect on services: tax rates MUST be lowered because you can see them before buying. Internet speed is irrelevant because no one knows how bad it is until they move in. So no one has workable internet. Americans schools are famously underfunded for this reason too.
It gives you a big incentive to veto all future housing development too. That's given us a very big housing shortages in many places.
The ownership model also makes people much less mobile, limiting their income and productivity, not to mention cementing inequality and effecting nation gdp etc.
Don't ever buy in a HOA area! That is the nightmare you describe.
No HOA in our neighborhood, so while all the houses were the same shade of beige with the same lawn when the developer built the area, over the years as people have repainted and redone yards it has become wonderfully colorful with each house having unique character.
The only logical reason for this I can see is people being terrified they'll lose 50k because their neighbours paint their house black and let the lawn turn to scrub.
Weirdly you can do what you want outside of that. So I can't build a turret on my house. But I could paint it pink and replace my front lawn with cactuses or cover it in junk cars.
No one can make me do anything to make it look nice. But I'm stopped from doing much to make it bigger or look better than the neighbours.
There are "listed" buildings (where you cannot change almost anything). But they're rare and you know you're buying Shakespeares cottage and gave to keep it exactly as is. And in a lot of areas you need permission to cut down trees over a certain size.
Mass ownership of appreciating assets is a very unstable situation, and also unclear what it even means. It is better to increase wealth through public goods.
It's very clear what it means - inflation. Consider a farmer in Zimbabwe who buys a used truck for 10000 Zimbabwe dollars to bring his produce to market. A few years later, he sells his truck for a million Zimbabwe dollars. He is a millionaire! But he still is a farmer and needs a truck to move his produce. Another used truck would set him back 5 million Zimbabwe dollars.
It can't go on like that. At some point the chunk of money that shelter takes out of the monthly paycheck can't grow further.
If you are trading up, the house you are buying is more expensive than the house you are selling. In this case you want a down market. Yes, you get somewhat less for your existing house, but you more than make up for it in what you save on the new house.
If you are trading down, the opposite is true. A hot market has increased the value of the house you are selling more than the house you are buying.
Yes I absolutely agree, the greater extent "homeownership is a middle class right", the more housing price rising just is an across-the-board inflation. To the extent that the poor / non-whites are not involved, it is stealing from them.
This is why fixed asset ownership is just a rotten scheme, inflation or theft, nothing good comes from it.
"store of value" is highly overrated. Public goods and infrastructure are what materially derisks the future. Not some bidding rat race.
Cashing out comes with the hassle to move, and is less attractive during pandemic. Rich people that want to decamp boost up demand in the select few popular remote places. That was the 2020 story.
Recently I am less sure exactly what's going, but yeah, single family homes are the worst!
The rest of the inflation is due to pandemic-related supply side dysfunction, and fossil fuels which are even more subject to random things like OPEC whims.
Raising rates to bring down SFH prices and not reforming the SFH system would be colossally stupid.
We have intentionally sabotaged the ability for our youth to afford houses under guise of safety while simultaneously grandfathering in our own shitty run down structures that were built under much looser requirements. The result is land with a shitty old structure can be worth almost as much as a new one, under this restrained and captured supply.
A smart first time owner will take advantage of this and effectively create an additional 1 or 2 living units (Primary residence+JADU+ADU) that can cover the new mortgage.
Honestly, I agree with one of the quoted people that ADUs are just a political hack to get a half-measure by the NIMBYs.
Even if we converted all the garages it would an extremely inefficient way to construct more housing. There was talk of trying to do financing for poor people to do the conversions, but insofar that that works I think it is likely to push up construction prices because ADUs are so inefficient.
(Conversely, the externality of decreased parking is quite good. I don't want to neglact that.)
If we really care about housing and equity for the poor, we should allow poor homeowners to trade in for a new condo if the entire block agrees, and then redevelop it at a massive scale. Far more housing, still equity for them, and once you bootstrap the process no one even need be displaced out of the neighborhood. Win-win
- the floor rent is too damn high, but the land rent is two damn low
- Ownership is very hard to price, but the existance of the instutition of ownership is a choice! By raising the land rent the price of ownership shrivels up, and that clamps down on the risks from this volatile and ill-defined problem.
- Rent is just better, what is bad is rent paid to owners, integrating the flow into the stock. Rent that cycles right back around as citizen divdend or gov services stays as a flow and is good. (And what ever evil inclinations states might have, profits are not one of them in the fiat era. (States == federal government in this case. State, local, and invididual departments could still be money grubbers.))
I see you've never rented before.
Landlords maintain power through the restriction of supply. They don't need to actively do it, the single-family-home complex does it for them.
Land value tax (+ land use regulation reform) demolishes that. Appartment management, divorced from land speculation, will become the boring low-margin business it deserves to be.
So homes have appreciated strongly in real terms in the last decade, but it's likely they will revert to the mean from here (whether it be quick or more drawn out).
However you're correct that historically homes mostly follow inflation, and aren't appreciating in real terms. It's only in the modern era where that trend has changed, probably due to more investor involvement and Fed trying to stimulate growth aggressively.
But it's important to note, even if a home appreciates only at the rate of inflation, usually the buyer only puts 20% down, so from their perspective they are earning 5x the rate of inflation in equity.
Pretty lucky to those that lived in 10% interest rate times that were able to buy all sorts of property cheap and refinance at low rates later.
Modern homes are typically an improved product, better features, and also better environmental facilities. Thus they should be increasing beyond inflation.