Comment by foldor | Hacker News Reader

Comment by foldor | Hacker News Reader

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The theory of that, and the reality of it are two different things. As someone who has been on both sides of this in Ontario, I can tell you for a fact that blind bidding results in people over paying, and never knowing by how much. The stress of buying a home in the GTA has lead people to stretch their budgets beyond reasonable limits, and realtors have only made it worse now. In recent years it's started to become normal for the list price to purposefully not reflect reality, causing the true sale price of a house to be left up to the buyers, and after probably losing dozens of bids, people get desperate and throw everything they can, which ends up in homes that regularly go over over $100k over asking.

When I sold my house, I had three bids, and the highest bidder payed over $30k higher than the second place. It was still over $100k over asking, with no conditions. That's just the reality of things right now, and it's not the sign of a healthy market for something as critical as housing. People are desperate, and it's getting worse.

This is wrong on a few levels.

1) as someone who has been on the ground as well, I’ve lost a few offers because I was worried about over paying. On multiple occasions, after seeing what it sold for we thought “damn, we woulda paid another $25K on top to get it had we known.”

2) Canadian banks has a very conservative “stress test” for securing mortgages. This includes qualifying at much higher rates then is being offered. Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

It’s still quite possible to stretch yourself. Variable mortgages are common and interest rates are going up at a rapid clip. It’s possible for them to rise further than the stress test numbers. Refinancing in five years may be painful if you got a mortgage at 1.5%, stress tested for 3.5% and refinanced at 5%.

Stress test currently means you need to qualify at 5-6% if you have 20% down.

If you are putting less than 20% then the stress test is even higher.

I doubt we will see 5-6% interest rates in the next 5 years.

Tell that to the 5.1% rate a friend of mine just got on a new home purchase with >20% downpayment. I dunno if rates are a lot better in Canada or something, but we're already in 5-6% range in the US for some properties. They had excellent credit too.

Interest rates are still at 2.5% in Canada. Still a ways off from 5-6%.

Rates are better in Canada. 2.3% is within the norm.

US mortgages are 30yr fixed. In Canada you cannot get a fixed rate for that long and 5 years is the norm - everyone here effectively has an ARM. This is why rates are almost always higher in the US.

> Canadian banks has a very conservative “stress test” ... Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

“stretch yourself beyond any reasonable limits” means that you may not be able to pay your mortgage, it doesn't mean the bank won't offer it to you.

The bank won't offer if you can't pay, at least in the US these days. But we have 30 year fixed mortgages, I think Canada is shorter

The norm in Canada is 30 year term, with a variable rate. It's the second part that can really get you...

30 years hasn't been possible in Canada for several years now (thankfully).

What is normal? It's hard for middle class people to afford normal housing stock in highly advanced countries without 30 years of amortizing debt. Yes, I understand that some countries force you to chain bullet mortgages over ~30 years to achieve a similar effect.

Why is that a good thing?

That makes sense, I would be terrified putting 40% of my pre-tax income towards a mortgage with a variable rate

I think you're conflating mortgage term (which is typically 5 years fixed or variable in Canada) and amortization. The latter can go up to 25 years for CMHC-insured loans at the time.

In a sense you are both right, you just don't set the threshold at the same place.

The bank will look at how much you earn and how much you owe and say "We can pre-approve you for $X at Y%". They consider that you can pay that rate and they are most likely right.

Now if you do take $X, you have effectively leveraged your entire earnings, which for most people is a pretty bad idea because stuff happens and you can end up with a mortgage you can't pay because turns out you also want a car.

That being said (at least in Canada), your broker won't really let you take the full bank offers, or at least they don't expect you to do it.

In the US, most lenders will do between 36 and 43% of your earnings pre-tax. Assuming you pay another 25 to 30 in taxes, this should be half of your disposable income, leaving 50% or cars food Etc.

For a $5,000 mortgage, that's a $5,000 a month buffer

Um. Look at your numbers again. Assuming your 36-43% is correct (I haven't shopped a mortgage in almost 15 years), that puts the combined total at 61-73%. Also, that combined tax rate feels really low for anyone with the income to effectively bid in this current market. Add up SS and Medicare taxes, federal income taxes, state income taxes, and sales taxes and 30% feels like a floor rather than a ceiling.

EXAMPLE: 120k income breakdown (10k/month):

Federal actual rate 16.5% (24% marginal)

CA State actual rate 6.4% (9.3% marginal)

Medicare rate 1.45%

OSDI rate 6.2 %

CA SDI rate 1.0%

Total:31.55% total before tax deductions and tax shelters

If your mortgage is ~40%, you have ~30% left over.

Per month, this is 4,000 for a mortgage, 3,000 taxes, and 3,000 remainder.

A 4,000/month mortgage covers a 800k loan on $1 million dollar home.

You don't get a lot of house in the bay area for 1 million, So if you are single earning this much, you are looking at condos.

If have two similar earners, you just double everything. E.g. 2 million dollar house with $6,000 per month remaining income.

You are not going to get an 800,000 loan with a repayment of $4,000/mo on a 120K income. For one, that's in jumbo loan territory with more onerous requirements for DTI above and beyond 20% down payment.

You haven't factored in property taxes, home insurance, or anything. Putting these numbers into a calculator, your monthly loan payment is going to be closer to $5,400 a month.

You're taking home $6,800 a month.

You're not living on $1,400 a month in the Bay Area.

No bank is giving you this loan.

That “damn we would have paid X more” is exactly what it’s designed to encourage - we’re not good at calculating large numbers so once you’ve “made the decision” to pay $500k making a decision to pay $50k more is relatively easy (and seems like nothing).

In a normal Dutch auction style situation you’ll pay $1 more than the second highest bidder, which is a bit more fair.

I think you mean a reverse Dutch action. Which is almost a regular auction.

In a Dutch auction (regular dutch auction. Not reverse.) there is no second bidder. The price starts too high and drops until the first bidder to decide the price is low enough (as it drops) buys.

Seems like you're not talking about over paying, but rather out-bidding someone. It seems like maybe a first offer should establish a baseline price, and everything subsequent should be transparent, or perhaps have a blind expiry on it, so you'd know if your offer was declined before an offer has been accepted

This part:

  Canadian banks has a very conservative “stress test” for securing mortgages.

... is excellent. More places need it.

Please stop gambling on housing as an asset class.

The middle class doesn't do it in France, Germany, or Japan. In those places, housing prices are kept _fair_ through clear, transparent planning and a blend of free market and regulation. What the hell is wrong with US/UK/AUS/NZ that allows insane leverage to middle class house buyers that drives up the price of houses? It's all silly to me. (I'm less familiar with how much CAN allows middle class people to gamble on housing.)

Yep, house on my street was listed for $950k a few weeks ago and sold for almost $1.4m. In my area (Kitchener/Waterloo), every house is selling for $250k-$500k above asking.

Houses are listed artificially below market to expand interest and create bidding wars. No one expected to sell for $950k and if that was the only offer they got it would have been rejected. I had this experience on a property in Toronto where they listed at $1.5 million didn’t get a bidding war, rejected our offer, relisted at $1.71 million and eventually sold.

Above asking is a meaningless number because asking isn’t a reflection of what anyone expects a house to go for. It’s a game price designed to attract as many of the right people as possible to the property.

There was a time in the not too distant past where asking was exactly what a house was expected to go for. When I bought my current home in the early 2000s, most homes went for under asking price by a small bit.

The question is, would an open auction be any better? The process will just happen at smaller increments. And you will have ghost bids to prop up the prices.

I would use a Vickrey auction:

https://en.wikipedia.org/wiki/Vickrey_auction

This is how real time advertisement bidding is done.

I think the issues with Vickrey auctions for houses is that a lot of buyers really have no idea what price they are willing to pay for a particular property. The open price auction format gives them a (weird and easily manipulated hint) at what price might be sensible for a particular home.

I think open auction really would be better. Allow full information on bids and participants can drop out when their absolute limit is reached.

Yes it would be better, because you wouldn't pay your bid (for many it seems to just be max affordable) that was potentially the largest by a long shot.

And I don't see that ghost bids propping it up would be much of a problem, they'd risk winning? You could require registering names, putting a deposit down perhaps, no real need for it to be anonymous even?

This seems intuitive, but it's wrong. As someone who went through the process, I think blind bidding suppresses prices, not inflate them.

When you are making a blind bid, the only information you have is the home itself. The ceiling for your bid is on what you think the house is "worth". You are very conscious about "overpaying" because you have no perspective on what other people are offering.

In open bidding, you are competing against other offers and the ceiling is basically what you can afford to pay.

Can't tell you how many times we lost offers because we didn't want to overpay - when the sold price was revealed we realized we would've paid another $25K on that had we known.

Well I suppose it depends on bidder mentality, sure, but in that case it's still better - you would have seen & bid the extra $25k and got it (maybe).

> In open bidding, you are competing against other offers and the ceiling is basically what you can afford to pay.

Well, what someone else can afford (and is willing) to pay. i.e. you never overpay, pretty much by definition.

(I think there probably exist 'open' auction system where the highest bid (not second) is paid, but the main ones don't work like that, and nobody's suggesting that as far as I've seen.)

Yeah I 100% agree open bidding is better in that it is a more honest and transparent process. I just don't think it will help with prices.

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