The 30-year mortgage is an intrinsically toxic product (2018)
byrnehobart.medium.com
byrnehobart.medium.com
I'm not an economist but my math is simple. I compare the Mortgage rates with Rent rates and the fact is that Paying rent for 30 years is money sent down the drain. For an average difference of 10% you would be the owner of the house after 30 years instead of just wasting all your money on rent without anything to show for it.
The whole discussion that this is a bet that your property will still hold or improve the value is meaningless, because even if it loses value (very improbable in most cases) it's still better than 0 that you are left with after paying 30 years of rent.
Now all of my math is not valid anymore if you taking a mortgage as an investement and not for your first Home and maybe that is what the article is about but still the Mortgage is very helpful for many people and just because it doesnt make sense as an investment does not make it toxic.
Add in the bigger intangible of the flexibility you gain from renting, and it's going to be a very individual decision.
Any mortgage at almost any fixed interest rate, assuming a market amenable to the local prevailing median income, will always beat renting. If the value goes to 0 somehow you still have a roof over your head. That is, assuming that the government doesnt take your property away. Which shockingly they can. Different discussion though.
There is a remark that's important here though. The math both you and I agree on assumes that the property is not an investment. The reality is all property is effectively an investment because even in good times 5-8x your salary was a decent price. Now it's more like 20x in some places. No one would make such a leap without being guaranteed something back. The calculus changes at that point. Even for first time homeowners.
Yes. One of the smartest finance guys I know says the simple model of taking the landlord's (imputed) mortgage yield and adding four percent nearly always predicts the rental level.
> even in good times 5-8x your salary was a decent price. Now it's more like 20x in some places.
But the causality of this is surprising: that's because interest rates have come down. So the repayment monthly cost has remained constant, but the deposit and salary ratio have shot up.
Now that rates are on the way back up one of two things has to happen to maintain the ratio:
- house prices drop
- inflation increases nominal-income rapidly past house prices
The use of 30-year mortgages hugely slows down those effects, though.
you got the cause and effect wrong here.
As long as you have the roof over your head, the value of the property isn't zero.
If you can no longer use the property as a roof over your head, it's value drops to zero. For example, the place is completely flooded, or destroyed in an earthquake (assuming no insurance etc).
> Any mortgage at almost any fixed interest rate ... will always beat renting
only true if you put enough constraints on the condition under which you consider this to be "amenable". In realistic situations, renting or mortgages could either be better or worse, depending on the circumstances. On average, it costs "the same" to live somewhere with rent, or via a mortgage - otherwise, there'd be an arbitrage opportunity!
> otherwise, there'd be an arbitrage opportunity!
Yes, people who would like to own but can't afford the upfront payment or are deemed too risky over a long time period have to rent from those with more capital - who turn a profit.
yes, and they turn a profit because they risked their capital into the property, but is allowing its use for the renter!
I dont think i'm missing the point. if mortgage is a lot cheaper than renting, nobody would rent. Therefore, market forces over time would push both to be mostly in equalibrium.
The key mistake I think you made is here:
> I dont think i'm missing the point. if mortgage is a lot cheaper than renting, nobody would rent.
You're forgetting the people who own the capital. Yes, in theory, there's an arbitrage here. One that has been fully abused by landlords for the last decade or more. Here's the rules:
1. Possess enough assets, capital, or goodwill to get a loan
2. Buy the house below "rent-rate"
3. Rent the house above "rent-rate"
4. Get $XXX nearly risk free since people need a place to live
In this sense you could view the insane rise in house prices as the market becoming "arbitrage-free" to use the term as loosely as possible.
The problem is at step (1). The average citizen cannot capitalize on the opportunity. The average citizen scrapes together somewhere between 4% and 20% for the house and lives in it. That's a substantial amount of someone's savings. There's no arbitrage. The only thing that they get is some theoretical money back between the rent price and their mortgage. In a practical sense all the owner did was lock in a rent price. Most people cannot even capitalize on the interest rate arbitrage that is available because again, I emphasize, you need to live somewhere. To capitalize on it you need to sell your house and buy somewhere else cheaper (e.g. another state). I don't think it's hyperbolic to say this is extremely difficult and likely impossible for most people. Myself included.
You also didn't discuss the problem of housing being an investment at all. The fact my mortgage has gone up $100 (due to property tax) but the apartments I used to live in are now $1400 more expensive says there is legitimately exploitation of the market going on. In the stock market this kind of front-running is illegal. The current strategy is:
1. Buy up enough houses to drive market price up by suppressing supply
2. Keep supply low
3. Artificially increase rents to increase profit margins
In the stock market this is very illegal. In fact there are numerous cases of this occurring throughout history in the futures market and people have gone to prison for it. If we're unwilling to fix the problem perhaps the SEC has a few rules we can adopt. Still doesn't stop the problem of exploiting the lowest level of maslows hierarchy of needs. This is probably one of the places where the free market cannot address both concerns. There are no amount of first time buyers whose total capital could out-capitalize Blackrock and Vanguard. It's simply naivety to believe that average citizens are causing housing to become unaffordable.
Lots of people don't have the downpayment or upfront legal fees available. They cannot buy.
The reason mortgage "looks" cheap, when only counting cashflow, is that they haven't considered the cost of capital.
If you add up all costs of a mortgage - including cost of capital (as well as maintenance etc) - it isn't cheaper than renting, and on average, i reckon it would be slightly more expensive, and at best it's neutral.
You must have had incredibly unlucky house purchases.
Then in The Netherlands, on average prices of houses go up. Fast enough even that for most people it is very hard to save enough money each year to even keep up with the housing prices.
Then we get to the point that with a mortgage, part you pay is interest, that money is lost, just like rent. But in part you repay the mortgage. That stays in your pocket. So even if the cost of renting is the same as the mortgage plus taxes and other costs, then the mortgage is still cheaper.
If you want to buy a house and you are currently renting then you are competing with people who see the value of their current house go up, and the part of the house that they own went up because they repaid part of the mortgage for some years. This makes it almost imposible to compete if you have been renting for a long time.
Obviously, there can be local market where the demand for houses is low enough, that renting a house can be attractive.
The renters do pay. It's included in the rent. Unless you think the landlords are, everywhere, happily making a loss?
And in HCOL places it’s not unusual for the landlord to not break even on a new purchase when you add up all the costs. Price appreciation (hopefully) makes up the difference.
A house that costs $8,000 per month in rent might cost $2M to buy.
At $2M that's $9,500 in mortgage payment at 6% for 30 years, about $2,800 in property taxes, another $300 in insurance, and maybe assume $500 per month maintenance (over the long haul).
That's ~$13,000 per month when rent is $8,000.
You can knock the $1,500 per month off the mortgage payment that is paying off principle, but you'd also need to account for the opportunity cost of a $400,000 down payment at some modest return of say 4% which is ~$1,300, so it's about breakeven.
The you need to account for transactions costs - all the closing fees and the 5-6% realtor fee when you sell.
All in, if you rent in SF, but invest the savings from owning, you're not really far behind someone who buys, but of course it all depends on price appreciation and over what time period.
That's not to say you can't get lucky and buy right before some massive price appreciation then sell and lock in the gains. But unless you have a crystal ball, you can't time that sort of stuff.
I hadn't adjusted my mental models for the new interest rates, I was still thinking 2%-3%.
Unless I’m wrong and SF is actually cheaper to rent always.
Even considering all this, it’s often only a small difference. And renting gives you a different and sometimes advantageous quality of life.
If you include historic price appreciation over certain periods, you can end up ahead owning, but nothing guarantees that same price appreciation going forward.
For non-rent control places new landlords subsidize the cost. It's happening a lot in Toronto right now. Tons of new condos that investors bought where the rent doesn't cover the monthly carrying costs. They are betting that price appreciation will make them whole (and more). That's a risky bet.
For rent controlled apartments, you basically pay based on what the tenant's rent is. So if you have someone paying 50% of market rate, that dramatically bring the value of the house down. I was renting in a 3 unit building that would be worth $6M empty, but with 3 tenants paying below-market rates, it was sold for about $2M.
- Move to a better paying job easily. You make instantly more money.
- Move to a cheaper place when times get tough. This gives security because your life is flexible and can adapt to the ever changing life.
- Change the space if you get a wife, kids, a dog, a parking space, or if they leave you. Well, the parking might stay.
- Leave if a neighbor becomes invasive, if they build a supermarket under your windows, if water gets contaminated...
- Get closer to your job so that you save time, energy and transport money.
- In case of divorce, you don't have to share anything.
- The gap between rent money and mortgage payment money can be used for anything. Sometime you can invest it. Sometime you can buy a gift or holidays. Sometimes it saves your ass for tough days.
Selling a house is hard. It cost money, time, energy, and you still have your loan running after that if you didn't negotiated early repayment. Plus, good luck getting a new loan to buy the next place if you are still paying the first one.
A house is a lot lock in, for the money it provides.
To me, home equity is a game changer for this discussion. the ability to open a HELOC and have access to a massive amount of capital is a gateway to real wealth thru various investment vehicles - not the least of which is investing in further real estate.. which will accumulate more equity itself etc..
- Homeowners can modify their dwelling. Renovations, painting, etc.
- Banks lend millions of dollars to ordinary people through mortgages. Subsequent loans can also be taken out against existing properties. This enables enormous leverage, with commensurate risk. A good way to get rich (or lose it all).
- Homeowners can be confident in their cost of living staying static long term, whereas rent typically increases every year. Decades later this can mean an initially pricey mortgage payment looks cheap compared to renting.
- Renters have the risk of being forced to move at the whim the landlord. Usually there are some protections like minimum notice periods and laws against arbitrary evictions, but there's always some chance whereas homeowners can stay put for generations provided they pay their continue to pay their mortgage and property taxes.
The entire point of the blog post is that achieving this for everyone carries vicious negative externalities.
If interest rates are going down or are stable, it does make sense for banks to offer them. Or course it can be tricky to decide if a long fixed interest period is smart of not.
Banks do impose a fine if you try to refinance a mortgage during a fixed interest period and the current market interest is lower.
I don't see negative externalities in this system. But maybe I missed something.
But you are correct. You shouldn't treat an owner occupied house as an ordinary real estate investment. The flimsy type of analysis that poo poos buying a house always assumes you'll live in a large cardboard box somewhere.
It assumes you'll rent a comparable place.
In my case interest minus tax breaks plus property tax is 40% of current rent for a similar place.
In any case, do your math for your specific situation and ignore blanket advice.
After those 30 years it's entirely possible that as a renter I have:
- been able to take advantage of moving freely for personal or economic reasons
- been able to move to a newer completely renovated apartment number of time for no costs other than moving my stuff instead of either paying for it or living in a house with a 20 years old kitchen
- been able to live without stress about all the responsibilities that come with owning a house, being in debt and tied down
- come out with enough money from my S&P500 that I started 30 years ago to decide to settle down somewhere and buy the house or continue as is with bunch of money saved up
I am not saying that this is what will always happen or that owning a house is strictly worse but the "rent is money down the drain, mortgage payments is money you keep in the end" angle is way too naive.
If you don't have a home that you own yet and your only options are mortgage or renting I'd pick the mortgage any time, but I'd always make sure to buy in a market that is active.
I am talking about putting the money in S&P 500 and similar without trying to time, beat or track anything.
> returns have been all over the place, from tripling my money to losing it all and everything in between.
Yes you are a bad investor and you should stop what you're doing and buy VTI or a target retirement fund instead.
It takes zero skill or effort to get average market returns that way.
https://www.investopedia.com/articles/investing/030916/buffe...
A lot of renters report that being forced to move house regularly is a huge source of stress.
> rent is money down the drain, mortgage payments is money you keep in the end
Mortgage is paying rent on a house-sized chunk of money which you have to spend on a house. Economically they're similar. Except the US has a big tax advantage which is only available to morgagors. (Does it also have the home capital gains tax exemption?)
- I can still move freely for whatever reason i want. I simply sell the house and buy a new one.
- the cost of changing a kitchen once in 20 years in your example but even once in 10 years is insignificant and the fact that I choose it according to my needs instead of getting whatever I find more than make for the cost.
- I have no stress of needing to move (generally the more flexible rent agreements that allow you to move out whenever you want also come with the risk of getting kicked out or rent changing significantly)
But again all comes down to the difference of rent vs mortgage and here in Europe for most people the difference does not make sense. let's talk specifics. Let's say rent is 700eur/Month and mortgage is 800Eur/Month. the difference is less than you would spend for frivolous, spur of the moment things.
In my adult life I have lived in ten rental properties and have purchased two homes (currently living in one of them). In my cases of home ownership, my property values increased enough over the time I lived in those properties that you could theoretically view the monthly outlay of my mortgage and taxes as nearly a zero sum game. However rent was always an expense and the amount of investment income I made on a theoretical “down payment” amount across the terms of those leases would not come close to erasing the rent I paid.
I realize this is anecdotal and specific to my location and frankly luck, but for me it makes having a mortgage make sense financially.
This doesn't take into account any work you have to do on the house, the notary and agency fees, and any taxes on the way. Your $300k worth of investment may very well cost you around $500K. If it's worth $800k later on, you earned $300k buy selling it 30 years later.
We can also add the cost of opportunity, since you can't move easily when you have a home to get a new, get closer to your children, follow you the love you just found, discover a foreign country...
And that's in the best case scenario where:
- You found a cheap good home.
- You actually end up liking leaving here.
- Nothing changes to the point you have to flea the place.
- No accident, no fire, no water pipe breaking, etc.
- You can ensure you can comfortably pay the mortgage for three decades.
That's... a lot to consider.
To give you an idea, here is what happen if you take the same down payment, and invest $100 a month and interests into the S&P 500 index for the 30 last years:
You end up with $11 159 316.
With no lock in. And no worries.
I think it's fair to say there is a difference of at least $100 between your rent and mortgage payment.
The S&P average return rate over 30 years is 7.5%. Assuming you invest all 100k from the start you would have 800k after 30years and that's assuming having a consistent index over 30 years something that is less guaranteed than the Property market.
You will usually not be as lucky.
$800k is still likely more than the house, with less worry, less locking, and less work though.
In my country the rent has usually been more expensive than the cost to service a mortgage (particularly taking into account only the interest repayments, not the principal repayments).
Mortgages are one of the only easy ways to leverage 5x for the average person, and over the course of 30 years you can expect to be earning more (inflation of your salary) whereas the mortgage stays the same.
Rent, on the other hand, typically rises in proportion to your income, so your cost are increasing each year. With a mortgage, your costs are either the same or decreasing if you repay the mortgage faster than the initial term.
Where I'm from, interest and dividends from other forms of investments are taxed as income, but repaying your mortgage is not. In addition, as long as it continues to be a desirable place to live and incomes keep rising, real estate prices will continue to rise as a function of income. This means that you're leveraging into a fairly low risk asset with good growth potential, and tax-free returns.
Plus all the intangibles, like being able to:
- Have as many pets as you want, or pets at all - Not be kicked out with a short amount of notice - Redecorate, put pictures up, improve the house as you please - No 3-monthly house inspections
I'm not saying home ownership is a panacea but it has a lot of positives over renting, both financially and otherwise.
My rent is 750€, and my mortgage would be about 1200€.
I didn't realize I could go the other way. This makes sense.
You're not left with 0 if you're smart. You take the money you didn't spend on a down payment and also the difference between rent and mortgage (plus insurance, maintenance, and property tax) every month and you invest it. These investments can be diversified and thus far safer than an investment in a single house. You also retain a lot more flexibility to move, which can increase your earnings potential among other benefits. After thirty years of earning and investing you may very well be ahead. The "throwing money away" narrative is misleading at best.
But I see now that things must be really different in the US because many people keep repeating (insurance, maintanance, property tx etc). Where i live in europe the the difference between rent and mortgage price is insignificant. let say for example 600Eur/mont rent vs 700Eur/month Mortgage. Insurance, property tax, maintencance are insignificant in comparison to the yearly cost of either rent or Mortgage.
To the extent that this is true, it's not a good reason to subsidize mortgages. It would be much better policy to encourage people to invest in diversified and productive ways, rather than leverage themselves to the hilt and sacrifice their mobility for a risky bet on endless property appreciation in their local neighborhood.
> But I see now that things must be really different in the US
Well yes, the whole article is about the problems of the subsidized 30-year fixed mortgage. Europe doesn't subsidize 30-year fixed mortgages in the same way, so things are clearly quite different.
You misread the jokey intro I think, which goes on to say it applies essentially everywhere in secondary effects; it makes no claim about the direct value of long term mortgages elsewhere except by implication that in similar systems generally they are a bad idea.
Over the course of 30 years, you will necessarily lose money to interest, money that you will never get back. At current rates of ~6%, you will pay more than the house is worth when you buy it. Add to this maintenance, property taxes, insurance, and HOE fees, and thats money that you will also never get back.
Lets do some rough math:
- 330k house, 6% rate. Total amount you will pay over 30 years is $712,266 - Yearly fees: HOA = 3000. Tax = 2500, Insurance= $1,820. Total over 30 years: $138600 Combined total: 850866. Net loss assuming house value stayed the same is ~520k
An area comparable. $1400 rent a month over 30 years is $504k. Difference in monthly payment is about $1000. Assuming a conservative 2% growth with safe investment, that $12000 per year put into those instead of mortgage over 30 year nets you about $500000. So you are better off renting.
Of course things change, and house prices can appreciate quicker than you accumulate interest, at which point you sell the house early, which is what most people are banking on. But that is never a guarantee.
In the end, you can do the math for you particular situation and figure out if its right to buy or rent. But owning a house is certainly just as much "throwing money away" as renting.
Owning a house is expensive.
In the East Bay right now the cash flow (mortgage + prop tax + maintenance) alone for home ownership is 2.5x my rent for an identical property. It comes down to 2.2x when factoring in mortgage interest deduction and rises back to 2.3x when considering opportunity cost of capital.
I did a broader analysis and came up with 1.75-2.25x for other homes.
For a rational actor to buy a home right now, it implies a 5-6% expected return on the home price every year for an average of 10 years.
If you only read Hacker News you might think WfH is dead, and it might be for FAANG-ish companies, but in my industry it is still as remote-centric as it has been since 2020. I see people hired every day and we don't even have a sales office in that entire state.
So yeah, having a locked-in 2.75% 30 year mortgage is going to encourage you to stay put, but that's probably a net positive thing for society because you are going to be more invested in the the success of the school system, and the local library, and getting to know your neighbors.
And if you're on the wrong side of the interest rates right now or need to move, maybe you have to rent for awhile or buy a more affordable house than you expected. That's nothing new and eventually things will revert and you'll be the next low interest 30 year mortgage homeowner. The banks will continue to win.
[*] It's arguable that low interest rates cause housing prices to rise, since more people can afford monthly payments on more expensive houses.
I basically think we're all getting 30 year mortgages because we have to support the inflated house prices which drive the last generation's investments. If we aren't left holding the bag on this generational scheme, then who knows - the next gen may need 40 year mortgages to buy us out of our homes at their wage rates.
https://observablehq.com/@a13o/anti-30-year-mortgage-calcula...
So if you can expect a reasonable pension, there is no reason to worry about taking a very long time to repay a house.
Obviously, the assumption is that houses will go up in value. If on average houses go down in value then this doesn't work at all.
In complex systems it is important (but not always easy) the distinguish effects of different causal order (the immediate role and impact, the second and third order effects etc.) The failings of modern financial systems are legion but incoherent rants in blog posts are not particularly helpful in sharpening and deepening our understanding of this beast we have created...
Without mortgage I'd still be paying for rent, possibly forever. My house already appreciated over 30% in 3 years and better investment than keeping the money in the bank or even the best years of the market.
The criticism is separate from the benefit to consumers. One could argue it's not a good policy to have 30 year mortgages, and it just encourages more risky behavior. I can't disagree with that.
But as a consumer, it has a ton of benefits.
The 30-Year Mortgage Is an Intrinsically Toxic Product – By Byrne Hobart - https://news.ycombinator.com/item?id=32949987 - Sept 2022 (5 comments)
The 30-Year Mortgage Is an Intrinsically Toxic Product (2019) - https://news.ycombinator.com/item?id=29774075 - Jan 2022 (149 comments)
The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)
When interest rates go up, refinance and sell you previous mortgage for cheap.
When interest rates go down, refinance and reap the lower interest rates for just the refinancing costs (you can always repay this type of mortgage at rate 100).
needless to say, the volatility on the bond markets had been extremely good for Danish home owners.
Can you explain this, because it seems opposite to the rest of the world (and since this is Hacker News, world = USA). You refinance...at a higher rate, and this is a good thing long-term?
in turn you cut off 200k of your loan.
This technique obviously only works under the assumption that the interest rates are going to drop long term, so you can refinance back to the lower rate later (which all of the people who made the trick believes).
So long as you don't participate, and rent their 2% yield properties and invest your surplus into business, you'll come out on top.
I feel it is unfair that capitalism is tarred with the inevitable collapses that follow. Capitalists are being pushed to the brink here. The regulators are where the push comes from that forces the US economy to take far more risk than is sensible.
That 'problem' is caused by regulation, structural regulation, not day-to-day regulatory enforcement or change. So where does that risk 'go'? Where do you suggest? What can regulators do to un-risk the risk that's been un-risked/passed on from those that take out mortgages?
But I don't know the details of how the market works. Wouldn't surprise me if there are other quirks at play.
If you rent for the same period of time, you piss away literally hundreds of thousands of dollars of home equity which you and your heirs can benefit from. But let's piss all over the greatest tool society ever created for creating generational wealth, because it's "capitalist," and that means it's icky.
So while paying off a 30 year mortgage might have been to pay off the house and keep it forever, that's not how Americans treat it. They basically use it as a way to get 10-20x leverage on housing prices speculation, and if they profit, cash out 7 years later and do it again with a new house.
It's 13.2 years. And perhaps it shouldn't be. There's lots of foregone opportunities when you stick in a home and don't move to better employment.
It's a way of saying ,,I give you a loan but I don't tell you how much more money you have to pay me back, maybe 5 times more interest as you may think now''.
They are designed in that manner to make them money.
Moreover, I also don't understand why people complain, you did not had money, so you asked banks for some, they gave it to you and are charging the interest.
I also don't understand the argument of students loan, you did not had any money to study, they gave it to you, and they charge some interest.
Over the years you might pay twice the amount you borrowed, but that's how interest work.
Do you guys not get the option to take the fixed rate?