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Comment by betaby | Hacker News Reader

I never understood that kind of US/Western point of view. I will give a trivial example: my grandparents purchased their house in year 19xx and both died in the same house in 20xxs. How's the price of house even mattered all their life? There were living there, it's not something external. Today, I specifically asked my parents if they knew how much their house cost. Nope, they didn't know. It's an irrelevant information for them. Cost it 10k or 10m won't change a thing - they live in it, it's not something external. So house-asset (why it's asset?) is something more US-specific I think. Also it ... bad?

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A good financial planner will emphasize this point. Rents go up, but your mortgage doesn't. So you buy a house and eventually forget about the relatively small mortgage payments that have effectively become smaller due to inflation.

The modern world of people moving and upgrading every 5-10 years has really changed this dynamic for the negative.

Of course, part of that 'upgrading' is that homes in a lot of urban areas have become impractically expensive for anyone who wants enough space for a family... but you still have to buy in ASAP if you don't want to be left behind by further market inflation. So cue 'starter home' nonsense.

There is/was a fairly straightforward explanation for the fiscal stimulation of home ownership and in the 60s government was not very coy about describing it: home ownership ties people into their respective communities by giving them a very tangible piece of "skin in the game". When you own a very expensive (relative to your total net worth) piece of real estate, that gives you a real incentive to take care of your local community. This in turn improves the stability of the society as a whole, since the large group of homeowners is not in favor of any real upheaval which might threaten the status quo.

> that gives you a real incentive to take care of your local community. This in turn improves the stability of the society as a whole, since the large group of homeowners is not in favor of any real upheaval which might threaten the status quo.

“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.

I meant "preserving the status quo" as meaning "society remains roughly in the same shape", ie no violent upheavals, revolutions or other drastic changes that would disrupt the ability of an average citizen to keep making a living. Think overthrowing congress in favor of a military dictatorship, or a couple of states seceding and trying to take the nuclear weapons stationed there with them. In that sense most of the western world hasn't seen that much "real" upheaval in the past century despite massive technological changes. We still have democracies that operate on mostly the same principles as a hundred years ago, sometimes with many of the same political parties as a hundred years ago as well.

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.

I think there are pros and cons to population movement, its not all negative. There is now more supply and demand which creates a more robust market full of choices. Obviously a big negative is the massive price increases that either completely price groups out or burden other groups in large debt, but I'll leave my points at that.

Geographical mobility is far lower now than it has ever been. This is generally considered a bad thing: people are staying in places where they can only subsist on transfer payments, and growth industries in prosperous places are limited by labor.

Perhaps it's a US phenomenon.

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.

> 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.

Isn't this a reverse mortgage?

Yup, that’s one common way to do it.

Here's one US-based example. Anyone in the US who is middle-class likely will have to sell their home or put it into a financial trust by the time they become very old in order to qualify for certain Medicaid benefits, which is the only affordable way to receive elderly care unless you're a millionaire. So from that perspective, thinking of the home as an asset can be important.

Medicaid in 49 states and DC has a 5 year look back period (California is 30 months/2.5 years) on transactions/disbursements with regards to intentional impoverishment. Something to consider when estate planning.

https://www.medicaidplanningassistance.org/medicaid-look-bac...

> Medicaid in 49 states and DC has a 5 year look back period (California is 30 months/2.5 years)

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.)

> Anyone in the US who is middle-class likely will have to sell their home or put it into a financial trust by the time they become very old in order to qualify for Medicaid,

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.

You should. While it's true that your primary residence won't be counted as an asset in order to qualify you for Medicaid, they can and will place a lien on the property if you ever enter into a nursing facility (and maybe in some other situations). This allows them to capture the proceeds if the house is sold while you're living or (in some states?) from your estate when you die.

Older families should strongly consider placing their home into some kind of trust or transferring ownership to a descendant before this becomes an issue.

“Will want to because of potential downstream inconveniences of” and “will have to in order to qualify for” are...very different things.

That's true, but I don't think most people would put, "the state sold the house my mom has lived in since 1972 and kept the proceeds" in the "downstream inconveniences" bucket. It's a pretty big deal! The whole point of getting approved for Medicaid is that you won't have to go broke paying for your healthcare (at which point you'd qualify for Medicaid, anyway).

    >> certain Medicaid benefits

Assisted Living and Nursing Homes. Medicare makes you burn thru your assets before they start paying.

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.

Medicare is the standard retirement healthcare plan and all Americans are eligible if they worked a minimum of 10 years.

Medicaid is for the destitute so of course you need to spend down assets to access it.

According to the American Council on Aging, "In most cases, one’s home, home furnishings, and vehicle are exempt." (from the asset test).

Yes, from the asset test required to qualify you for Medicaid. But if you enter into a nursing facility, for example, then they'll place a lien on the property and collect if the house is sold while you're alive or from your estate when you die (assuming there's no living spouse).

You really want to have a plan for your primary home before this becomes an issue. The asset test is only one concern.

People sometimes take out a home equity loan, which is kind of like going in reverse with mortgage payments -- you are going more in debt, using the equity in you built up with previous mortgage payments. If the value of your home increases you have access to a bigger line of credit.

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.

Even if I never move I can borrow against my house/asset. Sure, this can be abused. Don't blow it all on a vacation or a house remodel. But if an opportunity comes along to buy an income producing asset then debt is a wonderful tool. I'd rather have access to 100k of debt than not.

What if the cost of being in a position to access the 100k of debt is you have to pay 1k per year in additional property taxes, whether you use the debt or not. If property taxes aren't lowered to compensate for appreciated values, it starts to look bad for homeowners who live in their houses.

I live in the US and I've always found the idea of a house as something that is supposed to appreciate in value to be odd. Sure, it's great for you if it does, but I really don't think it should be an expectation. The only issue I can see when it comes to the price is if you want to move out after just a few years but the value has fallen. Hard to buy a new place when you're still on the line to pay the mortgage for your old place even after selling it.

The author actually address this a bit in the 2nd and 3rd paragraph. The US has added a layer of complexity on top of the plain vanilla mortgage. For the rest of world, mortgages are a way to pay for the house over time. However, in the US, they are into derivatives of the house price (pool them together, sell off the risk (rate of change of house price)), hence the title of the article: Mortgages are a manufactured product.

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.

Sure, but as a home buyer, what happened to your mortgage after you purchase your home only really matters to you as far as who the servicer is... you don't care or even know who owns the other parts.

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?

From the home owner perspective, the derivatives are nice because the borrower are able to get a lower mortgage interest rate, or a longer mortgage, or qualify for a mortgage when they could not before. The risk of non-payment is spread out, allowing less compensation for the risk.

Next two turtles are CDO-squared and CDO-cubed.

> How's the price of house even mattered all their life?

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.

> How's the price of house even mattered all their life? There were living there, it's not something external. Today, I specifically asked my parents if they knew how much their house cost. Nope, they didn't know. It's an irrelevant information for them. Cost it 10k or 10m won't change a thing - they live in it, it's not something external.

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?

If their house were 100B that means similar house nearby is also 100B and one still needs a place to live.

But why would they need to live nearby? Or have a similar house? Maybe as an empty nesters they can move to a smaller house and use spare change for other nice things?

If I walk into a room with 2 people and I offer one of them a million dollars to move to Cleveland, then one of them has something tangible and valuable that the other one doesn't. Older homeowners in markets that have seen a lot of appreciation are presented with this offer every morning when they wake up. Whether they take it or not is immaterial. It's a real offer that really exists.

> How's the price of house even mattered all their life?

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.

In the US, you likely can’t afford the house you want. So you buy the house you can afford. Ideally, and this has been the case since 2014, the value of the house increases. So, now you say, “wow, looks like I can sell this house and get a better one”. And let’s say you do that. But the new house you just bought only has 3 bedrooms, and not 4. And maybe you have 2 kids now and need 4. So you hope and pray your new-ish house has gone up in value, and most likely it has, by a lot. So you sell that and buy a new one. You do this every 5-10 years. Once you hit retirement age, you sell the house and move into a long term care facility (aka “an old folks home”). These aren’t cheap though. Affordable ones are $5k/month, most are north of $10k. So what do you do? Well, you have the money from the sale of your house and hopefully some retirement funds. That’s why it’s kind of important that your house value goes up. It’s how you’ll survive when you’re older.

> the value of the house increases. So, now you say, “wow, looks like I can sell this house and get a better one”.

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.

Not in my experience (3 houses so far, early 30s).

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.

The other element is leverage. If you put 20% down (which is higher than average), you are levered 5:1. If all houses double in value, your equity goes up 5x. (Example: $100k down on a $500k house; price doubles to $1mil, your equity is now $600k; you can now easily afford 20% down on the higher price house, despite the fact that it is now $2,000k from $1,000k when you started the process.)

In Canada, the price for the detached home that you want increases faster than the townhouse you could afford, so the plan of buying a starter home to help buy the home of your dreams is not really sensible anymore. It requires your other wealth/income to increase to compensate for the different appreciation rates of the house vs townhouse, or for you to move further and further from your current location, which will probably negatively affect your income or at minimum, your quality of life.

Your grandparents are the exceptional case (in the US, anyway). The vast majority of homeowners here change homes multiple times in their life (IIRC, once a decade or so).

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.

increases mobility for home owners whilst everyone else is locked out of a rising market. I'm not convinced this is a good trade off.

This has a lot more to do with zoning and urban planning that it does with the mortgage as a financial product.

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.

Did they care about what they were leaving to their heirs? What happened to the house after they both died in that house? Did the kids keep it? Sell it?

Even if you never use it as an asset in your life, it is still an asset.

I think 2 things here: people today seem much more likely to relocate due to work and other preferences...in 2018 the median duration of holding a personal property is 13 years, hardly a lifetime. But lets say that someone buys a house and owns it for a lifetime...eventually that will be passed down to the kids or whomever, and they may want to liquidate in order to move somewhere else. Although in 2008 and also today much of what was/is happening in complete speculation, which upends the market for many people.

Nit: "personal property" traditionally means any property except for real estate. Using it to mean "real estate" is confusing.

Further nit: while it is true that there are two types of property, real and personal, there are also several different uses of property, such as investment use, business use, and personal use. So one can refer to personal-use real property, such as a residence, versus business-use real property, such as an office building.

It seems TFA doesn't address commercial mortgages at all.

> How's the price of house even mattered all their life?

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.

Home equity loans are an obvious one. Or cash out refis.

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.

>500k at 3% interest and buy a dividend stock paying 6%

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.)

In the US, you are taxed for the value of your house each year. As it goes up in value, so does your property taxes. It's hard not to be aware of its value :)

In practice the market value of a house and the assessed value of a house (used to determine real estate taxes) are not as tightly correlated as one might assume.

That varies widely from one location to another. In California for example, your statement is mostly inaccurate due to the effect of Prop. 13, which severely limits annual increases in assessed value for current owners.

Presumably you inherit it and that is part of their plan to impart wealth to the next generation.

Housing is, unfortunately, not a human right in itself apparently. So we got care about it.

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