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Comment by dmurray | Hacker News Reader

> That’s in part thanks to mortgage rates. The monthly payment on a new home has increased by more than 50 percent in the past three years, as 30-year mortgage rates have climbed from less than 3 percent to nearly 8 percent.

Sounds like it's not just "in part", but more than 100% due to rising interest rates.

A $1mm 30 year mortgage at 3% fixed means paying $4200 a month [0].

The same mortgage at 8% requires monthly payments of more than $7,000 [1].

If the author's figures are accurate, houses have not got more expensive at all. Credit has become more expensive.

[0] https://www.saving.org/loan/loans.php?loan=1,200,000&rate=3&...

[1] https://www.saving.org/loan/loans.php?loan=1,200,000&rate=8&...

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Worth noting that this way of thinking is true in the inverse too — when interest rates were super low, house values didn’t really go up, only credit got cheaper. In other words, the appreciation in costs is not about house value, it’s about the cost of a loan.

But underneath, it really is just under-supply of homes. People are competing for limited housing, but instead of hitting a natural ceiling of affordability, they’ve continued to compete on prices by out-borrowing each other to offer ever-higher bids.

We now seem to be hitting the next ceiling — buyers are unable leverage their bids any higher. I can’t wait to see what “innovations” the financial sector comes up with to create a new ceiling. I’m guessing fractional ownership or something like that.

There is a new thing happening though as well. Existing homeowners with 3-4% mortgages are not listing their homes for sale very often anymore because they aren’t going to take 7% mortgage on the new property. This is keeping home prices pretty high. I don’t see a way for monthly mortgage payments to become affordable without this being addressed.

That it is not being addressed is a ridiculously pure market failure.

Let's say Jane & Joe have a mortgage at 3%, would like to move but don't have to move. The only reason they're not moving is because they're unwilling to take on a 7% mortgage. Somebody out there is holding the other end of that 3% mortgage, and would love to exchange that mortgage for one at a higher rate.

If Jane & Joe could get into the same room as their mortgage holder they would quickly hash out a compromise, exchange their 3% mortgage for a 5% mortgage; the canonical win-win situation that's supposed to happen in a market. Both sides are willing to make a deal, so why can't they?

But it's not happening because the bank they made the mortgage with doesn't actually hold the mortgage, it's bundled and sliced and sold on.

This is a huge market opportunity, and you'd think that eventually the same forces that figured out how to slice & dice mortgages will figure out how to take advantage of this opportunity.

Why would anyone offer a 5% mortage? That is only 0.4% over 30 year bond... Not nearly enough risk premium. Considering everything involved with mortgages.

But trading a 3% note for a 5% note straight up would be a fabulous deal. Sure, there would be a discount on the 5% note, but very small compared to the discount on the 3% note.

The idea is that it would be 2% over the existing mortgage.

If a lender has 1mm tied up in a 3% loan, They would love to convert that to a 5% loan on 1mm.

A lender does not have $1M tied up in a 3% loan. Many lenders have small pieces of that $1M tied up in multiple mortgage backed securities with various tranches of seniority.

The paperwork required to undo all of that and re-underwrite the debt would be enormous.

Yes, but that is the question and premise.

There is a lot of money to be made if someone can figure out how to do that paperwork. There are 12 trillion dollars of mortgage loans in the US, so converting a tiny fraction from 3% to 5% would be a goldmine.

Essentially a 66% return for doing "the paperwork". That's 660k profit for doing the paperwork on a loan previously worth 1mm.

This is obviously rare today due to the paperwork complexity. That complexity IS the alleged market failure.

How are you calculating the 66% return/$660k profit?

just ballparking it based on the ratios of the rates, 5/3. This is concervative due to the way loans compound and amortize. If you had a loan you were looking to net 1mm profit, you would net > 5/3 or >166% the profit a the the higher rate.

If you put it in an actual calculator, a 2 million,3%, 30-year loan will pay the bank back 3mm (1mm profit). The same principal at 5% will pay the bank back 3.8mm (1.8 profit, e.g >166%)

The numbers themselves are less relevant than the value proposition. If you could tell a bank that you will increase the profit on already invested capital, with no additional investment, they should jump on it.

This reminds me of the idea of people buying their debt out of collections, and I think it has the same price discovery challenges.

You say 5% is a win win compromise between 3 and 7, but how does any bank know that Jane and Joe wouldnt have paid 7.

Banks don't have a good tool to screen and price discriminate between customers for this to work.

Statistics. If you have a pool of people, some of whom would not be willing to jump without a good rate and some of whom would be, you offer it to everyone and you make more money than those who don't offer the good rate.

This effect is known as the "consumer surplus". People willing to pay more get the same price as those who aren't.

But is not a given it works out that way. It depends on the statistics. You could just as easily give to everyone and lose tons of money.

No, they're losing money right now by not offering it. Right now they're losing money on their 3% mortgages. If it converts to 5% it turns a loss into a small profit.

OTOH, if you don't offer the 5%, there are 3 scenarios:

1. the homeowner keeps the 3% and you keep losing money 2. the homeowner converts to a 7% with you and get a large profit 3. the homeowner converts to a 7% with somebody else and you make no profit.

#1 and #3 are by far the most likely options, IMO.

There's a fourth scenario - the homeowner pays off the mortgage early. In the US, early payment can involve a penalty, so the homeowner buys out the loan significantly above market rate.

Over the course of a mortgage, a significant number of homeowners will find they "need" to relocate for work or to join a partner or to upsize or downsize. Offering these people a big improvement on "pay a penalty rate to discharge your loan early" would cost the banks money, so they need to pitch any refinancing offer where it makes enough profit off the other homeowners to be worthwhile.

Would a bank pay cash to be relieved of a 3% mortgage? My brother sold his house half a year ago when he split up from his partner. I'm pretty sure they had a 15yr 2% mortgage. Did they do the bank a huge favor by just selling the house and dissolving the mortgage?

> Did they do the bank a huge favor by just selling the house and dissolving the mortgage?

No, the bank borrowed for 15 years fixed as well so they were getting their projected return on yesterday’s dollars. It’s not like they now have more money to invest better.

Banks effectively have infinite capital for mortgages and make pretty much the same margin whether rates are 2% or 30%.

The bank probably just bundled and sold on the mortgage. But somebody is holding the mortgage, and it is likely they borrowed for 15 years fixed.

But when the brother paid off their mortgage, the previous holder can now use that money to buy back that 15 year fixed bond at a massive discount. That massive discount is the huge favour the brother did.

Yes, they did the bank a huge favour. But likely they didn't have a choice, ~75% of mortgages are non-transferable, and they cannot hold the mortgage without the collateral of the house.

But if they were part of the ~25% of mortgage holders with transferable or assignable mortgages they had other options.

Yeah so I was wondering if a possible solution to your proposed market failure could be a service that motivates people to get rid of their mortgages by buying them off. This would eliminate the problem of having to find a counter party, you only have to find the people willing to compromise on their 3% mortgages.

Basically the business would be: Find the amount of money banks would pay upfront to the holders of the 3% mortgages, market that amount of money to the holders looking to move that otherwise wouldn't want to.

It would create a little bit of extra liquidity in the market and it might allow home owners to deploy their excess capital that they now hold back because of the awful deal they get.

Weird thing, I'm in The Netherlands and here 100% of the mortgages are transferable to a new house, at least within the same bank. I tried googling why that is but I only found all the banks advertising the fact without saying if they do that to comply with some government regulation.

Yes it would be a favor, assuming there is enough demand that the bank can then use the money from the 2% mortgage to issue a 7% mortgage or another >2% mortgage. Otherwise probably no.

They don't have to put it into a 7% mortgage, they can put it into a 4.6% 30 year t-bill, or something in between.

In a market with good liquidity, this happens via price adjustment.

(The valuation of bonds for example)

>interest rates were super low, house values didn’t really go up, only credit got cheaper.

It isn't one or the other. It is both.

People don't care much what portion of their payment goes to principal vs interest. Just the final monthly cost.

I feel like you’ve just refuted gp’s point about houses haven’t gotten any more expensive. People get mortgages, not buy houses. So while they are technically correct, it’s not a worthwhile distinction.

Monthly payments can go up too, but that usually has to do with other short and long term factors besides interest rate. Eg inflation, land and labor scarcity, ect

this is why the housing market is frozen up in the US, until job losses or something else force people to sell renters can't afford houses and home owners have no reason to sell because losing their 3% mortgage would force them to downgrade homes.

Check out Canada housing prices where they only have 5 year fixed rates, 1.3M dollar homes 2 years ago are selling for 700-800K. This is what will happen in the US unless interest rates go down again, it's basic math.

I didn't see this in Christchurch, New Zealand. Interest rates went up making mortgages harder to get.

However house prices remained steady and you couldn't see much price reduction in the market because if someone has a house and a mortgage, they don't want to psychologically take a loss. Few people are willing to lose money. They can't buy in same market (downgrade) because so few people are selling and mortgages are harder to get. Mostly the few people selling are only selling because they are forced to due to their circumstances.

The turnover (houses sold per month) dropped drastically.

We don't have 30 year fixed. We have essentially variable rate interest rates (you can fix for up to 5 years (median fixes for 2 years) but after that the interest rate resets back to current market rate - you can fix again for a few years at current market).

Well, kind of both. Houses increased in prices until Q3 2022.

https://fred.stlouisfed.org/series/ASPUS

After that point the 'sale' value dropped, but the interest increase has made houses massively more expensive.

> A $1mm 30 year mortgage at 3% fixed means paying $4200 a month

I feel like I'm teaching someone to suck eggs but but the price of houses has rocketed in both terms of absolute and relative-to-earnings.

Your $1mm house was $300k two decades ago, and $60k two decades before that. 8%/30yr on those sums was affordable. Interest rates of 8-10% were normal in the 90s. Expensive credit isn't the problem.

Use simple interest to pay down mortgage. Amortization is a scam paying all the interest up front.

Only people who can do all cash offers can afford a home

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