Hacker News Reader

Comment by tombert | Hacker News Reader

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility.

I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered.

If I had decided not to leverage several hundred thousands of dollars of debt, then yes I'd have more cash directly now, but I might have suffered the fate that lots of others faced with the recent spikes in rent that have happened due to COVID. I simply didn't have to worry about that.

Obviously there's different types of debt; some insanely high-interest loan you get from a payday loan place absolutely is a bad and will hurt your ability to stand volatility.

View on HN

I think the article still holds up. A financial crisis where you lose your job, a war causing deflation, a housing bubble bursting are all events that could lead to you paying _much_ more than rent. If you can't pay, they'll take your house and everything else until they decide that the debt is paid. In case of a bubble bursting this can mean that you _still_ owe money after they took your house. This has happened to people.

I also have a mortgage on my apartment and I also think it's a decent choice, especially considering that I'll have less income after retirement. But most people are only a couple of bad turns in life away of losing everything they own.

All in all, I'd say the way to think this article presents does hold up to mortgage as well.

> and everything else

Unless you live in a no-recourse state, where they can't take everything else.

In AZ, CA, TX, WA, and a handful of other states, banks can't go after your other assets, just the house that's mortgaged.

Interesting. Do you know if mortgage rates in those states are higher, to compensate lenders for the increased risk?

I think it matters a lot more for commercial mortgages. In any event, it's like 20-30bps or less according to the Fed. So higher, but not that much higher even for commercial mortgages, and even less for residential where there's a lot more federal protection going on.

The bigger impact, I believe, is that housing prices can go more crazy. People will take more risk if they know they can walk and leave the bank holding the bag, so there isn't that limiting factor on prices.

(Though I suspect, but obviously can't confirm, that the effect from non-recourse mortgage is absolutely dwarfed by other factors, especially out here on the west coast where we have very restrictive zoning policies, weaponized environmental policies inside urban areas, etc)

WA resident: our mortgage is 2.5% from the credit union. I've not noticed that current rates are any worse than other states I've checked. OTOH, in 25 years of living here, I've never seen house prices go down, only stay steady.

Home prices definitely went down during the great recession.

So did the wages, and those went down more. If you lost a job during that time, you're pretty screwed.

In CA, only the original mortgage used to buy your residence is non-recourse. If you refinance, the new mortgage is almost certainly recourse.

There is also a similar process, non-judicial foreclosure[0], which is similar to non-recourse in some ways, but not for tax purposes (e.g. cancelation of debt income).

[0]https://www.nolo.com/legal-encyclopedia/how-foreclosure-work...

>> If you can't pay, they'll take your house and everything else until they decide that the debt is paid.

This is new. Mortgages in the US traditionally took just the home as collateral. Thanks for the reminder that this is now a thing to look out for, as I may need to borrow one more time than I ever expected.

I think it's actually the reverse. The house is the only collateral, but traditionally you would still owe the deficit if the collateral couldn't be sold to pay off the whole loan. This is what's changed in recent decades. A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house.

> A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house.

This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to do so, but all of our mortgages are full recourse.

I can’t believe how much worse this seems, on a societal level, than the US.

A couple of other good points vs Canada: most fixed-rate US mortgages don’t have a prepayment penalty, and many offer the option to “recast”, which means you can make a lump-sum payment and reamortize your loan while keeping the rate and end date the same. This has the effect of lowering your monthly payment and is often used as an alternative to refinancing if you’re buying and selling a home in sequence.

Thanks for this. I’d never heard of this option and once again I am shocked at how much better Americans have it than Canadians when it comes to mortgages.

In Canada, it's actually worse than stated. You do have a prepayment penalty as long as current interest rates are lower than your loan's interest rate.

Now that interest rates are higher than they were a couple of years ago, TD Canada Trust waived all my prepayment penalties. They were happy to let me prepay as much as I wanted.

It's incredible how one-sided the Canadian system is. Prepayment is acceptable as long as the bank benefits. Prepayment is not ok when the person taking out the loan benefits.

I mean, manufacturing 30-year fixed rate fully pre-payable non-recourse mortgages does not happen in a free market. It takes a lot of government subsidies to make that happen—in particular the government assumes the credit risk on something like 85% of US mortgages. The United States government is very into the idea of spending its resources to subsidize homeownership. Canada has made different policy decisions, like single-payer healthcare. If the societal choice was between universal healthcare and extremely borrower-friendly mortgages (and I don’t think that it really works that way, at least not in such stark terms) I’m not sure I’d pick the mortgages.

It can happen. There is risk, but the reward is very high and so it is worth it.

However the government often will not allow you to get the full reward and so while the numbers work out for everhone in a free market it doesn't happen. adjustable rate mortgages in the us are lower interest rate. Often in the us they are a better deal - we are just looking at one case where everyone in a fixed rate two years ago is better off than those with adjustable rates.

> It takes a lot of government subsidies to make that happen

No doubt, but the upside is a populace not especially at risk to interest rates which is absolutely crushing and systemically risky currently.

> in particular the government assumes the credit risk on something like 85% of US mortgages.

In Canada, CMHC does something similar so I am not sure we get away with anything special that the Americans are not.

I read my mortgage papers carefully before signing. I made sure there was no early payoff penalty.

This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/

In Canada? Who was your lender? I did an exhaustive (I thought!) search when I last got a mortgage and could not find a fixed rate option that did not have a large prepayment penalty.

In the US. I don't know much of anything about Canada.

> In Canada ... all of our mortgages are full recourse.

Except in Saskatchewan and Alberta [1].

[1]: https://financialpost.com/personal-finance/mortgages-real-es...

Wow thanks for sharing. I had no idea.

You should ask your parliament to create the equivalent of Fannie Mae and Freddie Mac in your country. Gov't backed and buys loans from retail/commercial banks under strict guidelines. This helps to create a huge fixed rate mortgage market in the United States. I agree: Fixed rate mortgages are terrific for increasing home ownership. Plus, it moves the interest rate risk from retail people (less sophisticated) to institutions (banks, etc.) (more sophisticated).

That is just the mortgage. I assume that you also defaulted on media and anything else you had on credit, such as student loans.

And those do not have such nice terms either.

> they'll take your house

Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you.

I.e. you'll get the equity portion.

It's in your mortgage contract. Worth reading.

Yes but I think they're referring to negative equity.

No snark, but posting with genuine concern for any homebuyers who didn’t experience the pain of 2008, please read and grok this: https://www.investopedia.com/terms/u/underwater.asp

Unless you're backpaid enough so that they take equity in a penalty.

And now you're homeless and with your equity you cannot acquire capital. Your credit is also tanked due to the default...

Remember, most people do not own multiple houses and having no stable address can really mess you up legally even.

What would be different in this situation if the person were renting? Usually costs are similar per month for comparable places. I guess the down payment is a difference? But if you’re that far in arrears on rent you’re really still bad off…

I don’t feel convinced that having a mortgage debt is that much worse than not having one, if you lose your job and war and other bad things.

If your house is still worth enough to cover the debt. If the sale of your house is not enough to cover it (which can happen if you bought during a bubble that burst), will your whole debt at least be forgiven?

It's not forgiven, even in a non-recourse mortgage. So it can still e.g. hurt your credit score. They just legally can't pursue you for it.

With a recourse mortgage, they can go through normal debt channels (including wage garnishment, etc).

"[R]ecourse mortgage": It would be better to say "recourse loan". Mortgages are specific to properties. Loans are generic for anything. In my personal experience, non-recourse loans are basically payday loans with horribly high rates. You would never do it, if given the choice. I guess that 100% of home mortgages (in highly developed countries) are recourse by legal requirements.

> I guess that 100% of home mortgages (in highly developed countries) are recourse by legal requirements.

Not necessarily so in the US. In several states (including the biggest ones like CA and TX), non-recourse mortgages are the default. In other states, sometimes non-recourse mortgages exist too.

E.g. right now I'm sitting on a 2.5% fixed 30 year non-recourse mortgage.

In short: yes. Imagine you bought a home using a mortgage in the year 2000 in Silicon Valley. Then you go bankrupt in 2007. Your home will probably have appreciated 100-200% during this crazy period. It is very possible you will receive money back from the bank after they sell your home.

My question was specifically about the opposite case, so I'm not sure what your point is.

Specifically, I'm asking if the mortgage deals the poster above was discussing would help if the house is now worth less than the mortgage.

If there is a war you leave your house behind. If you rent you can save the difference in a foreign savings account.

the point is there is alway risk and many different situations. depending on details there are different results.

The way I think about this is:

You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive.

By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability

There are lots of ways that stock in food and energy companies could go down while prices go up. A drought or pipeline disruption come to mind.

Absolutely. And I think the same is true for the commodities market correlates there; if memory serves correctly, crude commodity futures went negative for a break period during the supply chain volatility spike during the beginning of the pandemic.

You are correct, for oil contracts near expiration. All oil containers (in certain areas) were full, so anyone taking delivery would need a place to store the oil.

The market needed a way to transfer this risk (risk of delivery) so prices went negative meaning you were paid to find a place for the oil.

It's really neat actually and shows how almost all of the financial system is really a big "risk transfer" mechanism.

Besides taxes, there is another sense in which outside circumstances can break your "rent control" model of home ownership with 30 year mortgage. Here in Oklahoma, insurance rates have skyrocketed in the last couple years. I now pay more in homeowner's insurance monthly than either my principle or interest payment (though perhaps not both together - yet). And I have a 4.something% mortgage.

I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure - if I didn't have a bank loan.

It's not just insurance (which is likely also weather-related); after a fluke super-cold Winter we had, our natural gas companies incurred a huge wholesale market bill which they've passed on to customers. I have a family member who owns his house free and clear whose gas bill went up so much he could no longer afford to heat his house. The gas company still tried / is trying to assess a one-time very large retroactive fixed fee even though he turned off his gas.

My point, I guess, being even homeowners are not totally insulated from being screwed over by outside market forces.

You don't HAVE to carry home insurance do you? You can also change policies for different levels of insurance at any time. It's not exactly a debt, but an ongoing service

If you have a mortgage, you are required to insure the building at the least.

Banks want to insure the collateral.

To the point where if they're notified that your insurance has lapsed, they will warn you to get replacement coverage, or they will and then bill you for it.

I had a not so fun experience with switching insurance providers at about the same time that my bank was about to make the insurance payment out of escrow.

That was something we had to worry about when buying our house.

The house I have is pretty old and the roof had some issues. I obviously was planning on fixing those, but it became a bit of a catch-22 problem; the insurance I was planning on using (cuz I had a discount from my employer) said that they wouldn't insure me until the roof was thoroughly fixed and/or replaced, but I couldn't fix the roof until the deal closed, and the mortgage company wouldn't close the deal until we had insurance. We were afraid we'd have to pay the insane insurance rates from the mortgage company.

Fortunately, after multiple days of shopping, I found one insurance company that agreed to insure me as long as I fixed the roof within 30 days of closing, which I did.

I had a similar issue with buying a house. In the end we just wrote the roof replacement into the contingency of the contract and adjusted the price a bit so both sides paid a little bit into the cost of the new roof. The roof was replaced, we got our insurance, and the house was sold.

I am pretty sure that at least in NY you are required to have insurance if you have a mortgage.

I guess once the mortgage is paid off for whatever reason you’re welcome to not get insurance.

In Berlin, only a small percentage of landlords beat inflation. It's a lot of work and a low return for an illiquid investment. Depending on the timing, many qualify housing as a lifestyle decision instead of an investment.

Aside from what you've mentioned, the state can raise the efficiency standard to protect the environment, raise the cost of services, or make you pay to rebuild the street or sidewalk in front of your home. Then come the maintenance: new roof, new windows, new kitchen and so on.

If your country has good tenant rights, there are not so many reasons to buy. It's better to invest the money for a while.

Assuming it's market condition based and not specific to your house, rents would easily pass along insurance rate hikes to you as well. I don't see much difference in insulation from that for renting vs. buying.

>I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure

Heh wait till you go to replace the property/damage. Unless you're doing yourself you'd absolutely crap on the floor once you see how high prices have got for this work.

Add to this the increasing incidence of weather/climate related damages to homes and the situation isn't looking good for many states.

> Here in Oklahoma, insurance rates have skyrocketed in the last couple years.

I thought this was only a problem in CA or FL. I wonder if this is nationwide or specific to states with disaster prone areas.

> Here in Oklahoma, insurance rates have skyrocketed in the last couple years.

Insurance company profiteering is a disaster but that's a whole different topic.

But remember that rental properties are also insured. And the renter is paying for that insurance, it's just bundled in the rental price. So renters are also paying the wild insurance hikes.

And utilities like gas are generally directly paid by renters, so no difference.

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfortable place for our partner, etc. So we have to take this risk.

If you ask a financial advisor for advice on investing half your net worth on 5x leverage in an liquid asset with one customer and one location, they'd think you're crazy.

But most of them would not think you’re crazy once it’s specified to real estate. This means either financial professionals are blind to the similarities or there is something critical missing from your description.

It's that people have an irrational emotional attachment to homes and financial advisors know they wouldn't be in business if they told prospective homeowner to put the money in an index fund. Where owning a home wins is it forces people to set aside income and put it in an asset rather than spend it, but there are other ways to do this.

I think it’s a lot more nuanced than that. Leverage is great, being able to do what you want to your living space has value. It also locks in your housing costs. There are tax advantages.

It’s not just a forced savings plan. That isn’t to say it’s for everyone, but it’s important to get the nuance.

(Also, it’s not really fair to say an “irrational” emotional attachment - that attachment can generate great joy and a sense of ownership, those are real things and not irrational even if they don’t make someone more money. It’s totally rational to optimize for things outside of money!)

When that one customer is "your family", it's a little bit different, though.

PS: From context, I suspect you meant to say "illiquid asset".

> When that one customer is "your family", it's a little bit different, though.

I think it makes it worse.

How so? You control the customer’s buying decision and the product on offer is “living indoors”, something that you’re not going to easily decide to cut from your budget.

> If your house loses half its value, that represents hundreds of thousands in losses.

I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house.

Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?

Well, you don't always know if you're going to want to sell later. Maybe you lost your job, maybe you need to move to another city, maybe you just hate the neighborhood.

Right, all it takes is for the large local employer to suddenly downsize, causing both the loss of job, and the crash of the local housing market simultaneously.

Not just one employer, sometimes the entire industry goes down! Just look at the housing market in Detroit or Youngstown

Shouldn't this be priced into the house value in this local market?

it usually isn't because banks are not all-seeing and cannot tell which local employer or industry is likelier to go bust. in that sense all metro areas are often equally risky.

> it's still the same house

What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.

That isn't true.

The marketplace valuation is just where individual suppliers' and demanders' valuations cross.

The individual valuations are the foundational reality, or the market wouldn't work.

Every time you buy, sell, or decline to sell or buy something, you are operating based on your own valuation. So there is nothing theoretical about it.

> That isn't true.

People find out it is true when they try to sell something.

> If you wouldn't sell your house for $1M, then it is worth $1M to you

If you're willing to pay $1M for it, then it's worth that to you.

>> If you wouldn't sell your house for $1M, then it is worth $1M to you

(Sorry, deleted that phrase after getting distracted while making my comment. In my mind the edit was instant!)

> What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.

> People find out it is true when they try to sell something.

Of course there is intrinsic value. A buyer has to pay you what you want for your house.

You are setting the market price.

If someone wants it, thats what they will need to give you.

We often use the word “worth” to mean “what would be the best offer I might get. But you won’t sell it if it is “worth” more than that to you. Which “worth” is usually obvious from context.

Valuations happen on both sides of every trade, and most often both participants end up with surplus value. The seller getting more than their minimum price, the buyer paying less than their maximum price.

Even market makers commonly post prices with surplus relative to their neutral trade valuation, and typically move their price if their are no takers. They want a trade at X, but will try for as much surplus as they can before settling for X if they have to.

> A buyer has to pay you what you want for your house. You are setting the market price.

A buyer offers what he wants to pay for it. You negotiate until reaching an agreement. That is the market price.

I.e. The Law of Supply and Demand.

If you think the seller sets the market price, try selling your car for $10 million.

Don't you think that your take is a little bit reductionist?

There are plenty of things which are valuable or bring value, but are never sold or bought.

Case in point: how much is the Sun worth according to you?

I don’t have any ability to make choices about it that depend on any conscious valuation.

But do you doubt I value it because I am not buying or selling it?

I suppose near infinite, in that I would certainly sacrifice everything I have to protect it - given it represents the survival of all of us - which for me at least would be the apex of value.

It is worth noting that value can often be measured in currency, but not always. It is ultimately an ordering of everything, by kind and quantity.

In the end, even money is just another “thing” which we value on a gradient and relative to context (what we need to survive, we value a lot. To live Without stress, a lot, but less. More than that, even less, even if we are ambitious.)

Market value comes directly from each of our personal, “intrinsic” as another commenter called it, valuations. There is no market value where there are no personal valuations. But there can be personal valuations where there is no market.

Each of us still prioritizes what we have against what we want, and the costs to us of that, even if we were hermits. Each of spends our time, the ultimate resource, based on our relative values of things.

That is the source of all “value” or “worth”. Individual or (and before) collective.

A house has intrinsic worth. It is a house, people live in it, it provides shelter by it's nature as a house. How many dollars it's worth to others is extrinsic, but it certainly has intrinsic value.

> A house has intrinsic worth

It's value is only what people will pay for it.

For example, a relative of mine died some years ago. She had a house full of expensive furniture. You couldn't give that furniture away, even though it was in perfect condition. It had no value.

The average estate value, excluding land, houses, and cars, is about $900. I have friends who ran an estate liquidation service. You'd net something like 5 cents on the dollar.

This is one reason why I buy stuff at the thrift store. I bought a perfectly good chainsaw there for $10.

You are thinking of worth and value only in the monetary sense, and the person you are responding to is referring to a house's ability to be valuable to individuals, even if nobody else will pay for it, because it provides them shelter, satisfying a basic necessity.

This is most of where its monetary value comes from (obviously not universally true, many properties have simply become investments), and its monetary value would probably only completely evaporate if the house were so degraded that it could not function as a shelter.

The monetary value of most houses is rooted in their ability fulfill a basic human need, as opposed to the monetary value of some other things, like gold or bitcoin, which are valuable primarily because of what they are worth to other people. Even if you disagree with using terms like 'worth' and 'value', you must agree that a house has utility that is not affected by its market price.

> you must agree that a house has utility that is not affected by its market price

The market price is determined by how much people want it, of which utility is a large component.

Agreed, but it is the utility that is the root of the value, and the relationship from utility as shelter -> market value is one way.

> It's value is only what people will pay for it.

If that is how you define it then by definition that is true. It is not the only possible definition though.

In my world I prefer to sleep in a place where the rain doesn’t fall on me. Having a place with a roof over me is value to me. If this meaning of the word “value” does not work for you then simply we are talking different languages.

Perhaps try thinking about “how much would i need to pay to provide the same neccesity if I wouldn’t own this place”. Maybe that puts it into economic terms what we are talking here.

The value of it to you is how much you're willing to pay for it. There really isn't much getting away from that.

That's furniture and not a house though. I'd guess that the average estate being that low value is not including outright-owned property/land. It's old people with a 20 year old car they've nursed through retirement, antiques that aren't in fashion, and bric a brac.

At least where I live, there would be a gulf between the estates of people who bought into the property market and those that rented their entire lives. Latter will have some furniture no one wants and scraps. The owners will have a $2m property and then investment property that get split up between their kids.

You care if you have a mortgage and you live in a non-US country where interest rates can actually go up to price you out of it.

You mean a situation where I could not afford the installments and therefore would be forced to sell it?

In my corner of the world banks are required to assume a 2,5-5 percentage point buffer when calculating mortgage eligibility - the upper bracket is for variable interest rate mortgages. An unlikely scenario, but keeps the risk of what you mentioned low.

No, it's far less risky to invest in housing. These two graphs over long term illustrate the difference in risk:

Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS

Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historic...

Though it helps to keep in mind that returns there are because the US housing market has been distorted beyond all recognition by under-building that goes back to the civil rights era.

You could also argue that there was population growth, and we might not see that in future.

So under-building in the future will be harder, as houses exist.

Of course, it's hard to know how population growth will work out in the future. And even harder to know how it'll work out in your neighborhood :D

even without population growth, household size decline means that there will be more demand for housing, since the same amount of people divided by smaller household size = more households.

Isn't the latter CPI adjusted, but not the former?

Thank you for that, I forgot to mention it: Both inflation adjusted and log plotting need to be turned off (as checkboxes) for an apples to apples comparison.

But your primary home isn't an investment, it's a necessity. You're going to live somewhere. The only choice you have is whether to buy or rent the place you live in. So that's the comparison that should be made. Comparing your primary home to your stock portfolio is pointless because you can't live in your stock portfolio.

The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.

Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all.

Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make sense.

Remember, leverage works both ways.

Obviously. Which is why 20:1 leverage (5% down) is kind of foolish, since you can quickly become underwater on a house purchase if the value shifts. At 5:1 leverage though, you still maintain enough equity to weather any valuation swings if you have a need to leave and sell the house.

This post is somewhat misleading. If you put 0% down (yes, it is possible in many places), effectively you have infinite leverage. But let's use your 5% example. If you house price falls by 50%, nothing happens to you -- even with huge negative equity. You keep making monthly payments. There is no "weathering" to be done. Sure, at the end, you might have a giant paper loss, but you still have a roof over your head -- that you own.

I agree mortgages cannot be called in, unlike margin trading on stocks, but if you’re wildly upside down on a house then it literally traps you in the house unless you take those losses. If housing prices fall 50% it is also likely that economic conditions may mean you cannot afford the same house anymore. In a situation of missed payment, they can certainly foreclose on your house.

While there is some "leverage" in mortgage, you actually need to pay the whole sum, and with interest too, so taking a $200k loan means you pay usually something like $250k for it in the end, and this means you have to make $50k profit to not lose. And houses age too. If the location is superb you can justify it as an investment, otherwise it's pure nonsense in every way. Thinking normal housing as an investment is one of those reasons why we can't have nice things.

What do you think leverage means?

If I take a leveraged position on a stock via margin trading and the stock goes to $0 (or, more realistically, it dips in value enough that I get a margin call) then I owe the whole balance, not just what I put up as capital. This is true of literally any leverage. And on top of that, I pay a margin rate in the form of an interest payment based on the amount of money I have outstanding beyond my capital. Sounds familiar, right? Because it's exactly identical. The only difference between a mortgage and a margin interest payment is that a mortage is amoritized across the term and is a fixed period, whereas margin interest is indefinite and acts more like a HELOC (i.e., you only pay interest on the amount that you have outstanding... and that amount can vary over time).

I absolutely hate the idea that "paying X in interest means that's money you have to earn in addition to make it worthwhile". No, it's not. It's money you are paying to free up extra capital elsewhere that can be invested more efficiently. Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.

You HAVE to pay back your debt if you want to pocket all your profits. If your down payment is 25k and you buy 250k house, you need to borrow 225k for your "leverage". Now you get lucky and years later, AFTER you have paid 25k + 225k + interest + fees which amounts to at least 300k, prices have gone up and you can sell that house for 400k. Nice you think! I will make 375k profit just by investing 25k! NO, that's not how "leverage" works at all. At that point you have paid at least 300k to get 400k which makes not that great considering it's been 20 years or so.

The logic you are using is flawed beyond all reasoning to be honest. People who are in a position to both pay back their mortgages AND invest heavily elsewhere are already rich.

You don't make 375k in profit off a 25k investment (in your example) if you sell a house for 400k. You would make 125k in profit using your numbers (minus fees, interest, etc). It's exactly how leverage works, and the equivalent in margin trading is 100% identical. The only difference with a mortgage is that you slowly deleverage yourself over time as a consequence of paying off the loan (principal that goes to value of the loan).

As an example, if you sold a house 5 years into owning it, at current interest rates, you would only have paid down approximately 6% of the 30 year loan, so the 'leverage' of a 20% down loan would still be ~4.8:1.

What you're skipping in this equation is that the amount of leverage drops every month when you make your payment. The average leverage is a lot lower than the starting leverage. That's what makes a mortgage pretty different from a leveraged trade.

> Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.

There's no free lunch. Often, investments will get you a better return than your interest fees. Often they won't. And "much much more" is downright wrong.

In today's 7% interest rates, yeah it's potentially a wash. In the era of 3-4% rates, it's free money. 'much much more' is absolutely correct at 3-4%, which a lot of people currently have mortgages at today.

> and this means you have to make $50k profit to not lose

No, it doesn't. Because the alternative was renting, which isn't free.

Even if you end up losing 50K on the home, all told, but if renting for the same number of years would've cost you 100K, you're ahead by 50K.

The returns might look better if you factor in imputed rent (assuming this is your primary residence). There are definitely investments with higher growth, but the (untaxed!) imputed rent is solid income over the lifetime of the house.

if you don't live there long term houses are a bad investment. Live in the same place for 20 years and it becomes much better.

Generally, to break even you've gotta stay at least 5 years. The transaction costs of selling a house are enormous.

Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance.

I just had to replace the roof on my house. Wow, that was a whopping bill. The roofer told me if I'd delayed another year, the bill would have been a lot higher, as he would charge $150 per sheet of plywood replaced. As it was, only one was water damaged bad enough.

you have to live someplace though. Over the 30 year life of that roof it is cheap enogh but that is a large one time cost if you only are there for 5 years.

Roofs are so expensive they factor heavily into what you can sell the house for.

Asphalt shingle roofs are lucky to get 20 years, cedar shingles are even worse.

Too bad metal roofs don't look great on traditional houses... I would love to install that

I bought a metal replacement roof. I was sold because there's a new kind of metal shingle. It's stamped to have the shape of asphalt shingles, and it has a coating of grit on it to match the color and make it safer to walk on. It's lighter and fireproof, too. (Lighter makes the house more earthquake resistant.)

I'm picky and it looks great.

In Australia, some houses have a tiled roof but most have Colorbond (galvanised, pre-painted iron). Life expectancy 70 years. Warrantied for 30 years.

https://www.google.com/search?sca_esv=d265e0c6ccb16526&q=col...

Not that expensive given the life of it. Mine is 15 years old and you couldn't tell it wasn't new.

I wanted that kind of metal roof, but the pitch of the roof would make it very dangerous to walk on to clean. See my other post for what I did pick.

"Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance."

If you manage to pick Microsoft in 2014, Apple in 2000, Tesla in 2015 and BTC in 2010, you are definitely way better off not buying a house but keep renting.

There are a lot of stocks that pay off better than housing. The 10 year return on the S&P 500 is 167%. It would be higher if you leveraged it with margin.

On QQQ it's 450%.

It depends on where you live. In CA renting is usually cheaper than a mortgage for the same property. Here in New Mexico my mortgage (2.6%) is cheaper than renting the same thing. With higher mortgage rates it’s not that clear but it still looks favorable knowing that mortgage stays stable for the next 15 years vs rents constantly increasing.

To be clear, no one is getting a 2.6% mortgage these days. Your post isn't a very good comparison. It is better to compare renting today vs taking a new mortgage today.

Where I live, rents have gone up a lot in the last two years so even with the higher interest rates owning is still competitive with renting.

    > rents have gone up a lot in the last two years

Where? In most places, rent is capped by the median income. Also, many people here are about middle income, so they are living in way above average homes. Yes, there, rents can really run away because you have higher income people, but middle class housing will barely budge.

> Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

Most people might not do the proper accounting, but not in the direction you suggest.

Maybe they made 100K gross profit but after deducting all the expenses they only made $1000. Ok, was that bad? No, it's great because the comparison is to renting where they would've lost tens of thousands of dollars.

> People don't realize how risky housing is compared to other investments.

Do not compare your house to other investments, that's as apple to oranges as it gets.

Compare it to renting, since you have to live somewhere.

> outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars

And home insurance, too. But generally, yes: over the course of decades an American fixed-rate mortgage really is a wonderful thing.

There is also the possibility of deflation to worry about, although deflation comes with many other problems. I personally think that worrying about deflation is like worrying about a meteor, or the collapse of the local government: if it happens, so many other bad things will also happen that my mortgage will be the least of my concerns.

You probably paid more for the house due to the government intervention in the mortgage market, although that likely raised the rents similarly.

I tend to agree with Dave Ramsey on this point. A home loan is just about the only “good” type of debt for an individual to have. Because it tends to retain or gain value with little risk. He also recommends a 15 year loan instead of 30, which has been amazing for me.

I thought Dave Ramsey was pretty much completely wrong about student loan debt, at least if I remember his position on it being "you shouldn't have student loans".

But I agree that most debt is probably bad to have.

It might be extreme but 15 years ago he was telling people not to be so flippant about taking on enormous amounts of debt for degrees with a questionable payback and I think he was right.

I always thought the snowball method was dumb but as time goes on I can see how it makes sense psychologically, even if not mathematically.

Sure, I've said a few negative things about Ivy Leagues being overpriced here in the last few weeks, so I'm not saying you should necessarily get into $400,000 of student loan debt.

What I didn't like about his take was that it also kind of also excluded getting into like $20,000-$40,000 of debt to go to a decent state school. That's a bad take; getting a degree (at least in a technical field) substantially increases your earning potential, and while $40,000 is a lot of money, it's not out of reach for virtually anyone working in tech or engineering or something adjacent, at least not in the US.

I guess my frustration with his perspective is that it felt extremely reductive; he acts like the only student loan debt you can get into is Harvard-level stuff, but I think that's just not true, and not even the average case. Most people don't get into Harvard, (I think) most people who go to college end up at a state or local university, and as such they're not getting into the obscene levels of debt that you'd get from these yuppie private schools, particularly if they state within state.

State schools are not ivy league expensive, but they are not cheap anymore.

of course the degree matters. You pay about the same for art and engineering degrees but one will earn far more than the other.

You age is showing a bit with your post. Randomly picking Penn State you get annual costs of $60k+ for out-of-state and $40k+ for in-state. [1] The cost listed on the page is only for tuition/housing. Use the calculator to get estimates for everything else. And that's an anti-cherry picked example, as I wanted to avoid absurdly expensive places like California, but while also going for a well regarded school.

You can easily get well into the 6 figures of debt even at state schools now. You'll find even rando state universities are hitting $30k+/year. Education costs have done exactly what you'd expect them to do when you convince people something is priceless and then give them unlimited and near unconditional loans to buy it.

I don't really see the point in this when you can instead attend English language programs in e.g. Europe or Asia and pay less for your entire education than you'd pay for a semester at rando state school in the US. Do a work-study program and you could graduate with a tidy chunk of change saved up, instead of graduating buried in enough debt to buy a house.

The ironic part is that this advice is even more pertinent for those coming from low income backgrounds, or from parents with limited education. But they're probably the people most unlikely to take advantage of such options, if not only because they probably just don't consider it.

[1] - https://admissions.psu.edu/costs-aid/tuition/

Fair enough, but in fairness not all state schools are created equal. For example, at least one SUNY college (SUNY Empire) is only about $3,535 per semester (at least for tuition) for in-state [1], so assuming eight semesters roughly $30,000. I grew up in Florida, and the first college I went to was Florida State, and tuition is roughly $5,500 as of last year for in-state [2]. I feel like there are plenty of options for perfectly decent universities that fall roughly into that price range I specified in most states, so I think my point still stands.

That said, I'm a huge fan of European/UK universities. I do graduate school in the UK, it's a lot cheaper than a comparable program in a lot of American universities. I've been trying to get my considerably-younger brother in law to consider applying to European schools.

[1] https://catalog.sunyempire.edu/undergraduate/tuition-fees/#t...

[2] https://admissions.fsu.edu/first-year/finances/

ETA:

Sorry, I didn't see the "housing" part of your first sentence. That certainly does make the costs add up, particularly if you stay in the dorms, which I think are kind of a scam in most schools. I think to save money, a lot of people would benefit from trying to stay with their parents a bit longer instead of partaking in the dorms.

> I can see how it makes sense psychologically, even if not mathematically

He acknowledges this. It's about the psychological effect of seeing your list of debts grow smaller. I think a big part of his audience are people who have historically been very bad with money, which is why some of his advice seems strange to people who are already financially responsible. People with a bunch of maxed out credit cards and loans on ATVs and crap.

I do think the snowball method also makes sense mathematically, depending on the loan terms and what you're optimizing for.

If your loans have a minimum payment and a penalty for missing a payment above and beyond interest (which seems to be common for loans in the US), the snowball method gives you more flexibility. Paying off a loan completely eliminates that part of your monthly minimum payment.

If in 2 or 5 years your income decreases unexpectedly (layoff, etc.), but by that point you've completely eliminated 1 or more loans, you're more likely to be able to continue making minimum payments.

You know, that's a fair point I hadn't considered much before. Thanks for sharing the perspective.

While I think Dave can be helpful for some, having 30 year old loan makes more financial sense if you are financed at 3%. You can pay it off sooner if you want.

The further you get from the initial purchase date the dollar will have a lower value, and in theory you should be making more money.

Plus, even tbills are returning over 5% and are state tax exempt.

That's not always the case if you have a prepayment penalty on a mortgage (which isn't always the case but certainly something to watch for).

Very uncommon in the US but one needs to do their due diligence.

> I have a 30 year mortgage on my house with a 2.75% interest rate.

The author on paying down his mortgage:

> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.

* https://rationalreminder.ca/podcast/128

* https://www.youtube.com/watch?v=NSaRb-iFwPA

> I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"

This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subject to this) then you can certainly find yourself being subject to nuevo rent rates as a long time mortgage holder.

I do agree with you that different types of debt should be classified differently.

I've experienced this. My property taxes have gone up maybe 30% in the past few years. My income has increased pretty substantially, so it's not like I'm unable to pay for the increases. Compared to rent though, and having a mortgage where every month the amount of principle paid off increases, it still seems like the better option.

Rent has increased 30-50% where I live over the same time period. At least when my property tax increases, it's because I have an asset that has increased in value. If I am at some point forced to sell because I can no longer afford the property taxes, then I'll walk away with more money than if I had been paying rent for those same years.

Property taxes can force the same type of relocation that rent increases cause, but I think the typical outcome from someone being forced out by rising property taxes will be better than the person forced out by rising rents.

Fair enough, there’s a maximum that they are allowed to raise property taxes in NYC (6% in a year, 20% over five years); my rates will eventually go up, but not super fast.

Yeap! We're subject to a similar maximum in Portland. It was one of the aspects of government I specifically shopped for before we relocated. I did wish I'd looked more into the ever-expanding income tax we have at the city, county, and state levels but that's a different cost structure that's only significantly worse when factoring in Trump era tax reform.

>This only works in places with fixed property tax

Critically, this also only works in places that offer fixed-rate mortgages. In my country (and most of Europe I believe) they are relatively expensive and the rate is fixed for only ~5 years (after which you either change to floating or update the rate). So basically nobody considers them long-term. Damn, I envy Americans.

Are your mortgages cheaper than ours on average? I couldn't imagine doing a variable rate loan in the US. You can literally be had in a single year with a variable rate.

debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense

debt for productive activity in general makes sense if it isn't compounding (mortgages act like simple interest, btw, although it's complicated since you pay more interest at the start of the loan and so if you move within the first five years you've paid almost entirely interest on the home)

debt for consumption is always parasitic

that's why it's insane how hard it is to get a business loan and how easy it is to get a credit card: usurers want suckers, not shared risk on productive investments

> debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense

Has there been a 20 year stretch of time in the US in which housing is broadly a depreciating asset?

Seems that land is definitely, and housing for the most part, an appreciating asset over time due to scarcity.

I'm not answering your direct question but for reasons, I'm interested in Indiana farm land in the 1920s and 1930s. From a peak in 1920, price per acre was down 2/3rds and didn't fully recover until 1948.

The Great Depression started early for farmers...

https://ag.purdue.edu/commercialag/home/resource/2023/08/the...

Not sure if farmland to housing land is a 1:1 comparison in many places. Where you can dig well (and hopefully get safe water) and use septic it may be as you can get power almost anywhere, but some places require utilities which increases prices significantly

housing is, by definition, a depreciating asset: it wears out

you are asking if real estate prices have fallen over a 20 year period in the US and the answer is not in the modern inflationary era:

https://fred.stlouisfed.org/series/QUSR628BIS

but that mixes land & housing prices together of course

prices have fallen over 10 year periods (sometimes dramatically) however, and the average length of ownership is 8 years, so timing can make a huge difference in outcomes of home ownership, particularly with the leverage involved.

Depends where you live! There are plenty of cities that have gone downhill. I could easily see some big sun belt cities getting too hot in 2044..

Covid is one example. The PPP loans provided by the federal government to businesses were forgiven. That sort of stimulus, combined with massive inflation, is favorable to a debtor, not a saver.

For many, taking on debt in 2018 to buy a house for 200k would have paid off greatly by selling in 2022 for 500k. In an inflationary environment, you should grab as much cheap debt as possible.

Are you going to live in that house for 30 years? What’s your plan when you need to move?

Sure, why not? I can't speak for OP specifically, but generally living in the same house for decades is very common. I'm coming up on 15 years in my house with no plans to move, and most of my neighbors have been there even longer. My parents lived in the house I grew up in for 40 years until my father passed away and my mom needed to downsize.

In any case, if they move, then the price of the home they are selling will have gone up (or down) more or less the same as everyone else's, so it basically works out to a wash.

Even if I don't stay in the house for thirty years, it's still better as long as I stay for awhile. When I'm paying my mortgage payments, I'm building some degree of equity into the house, so the only "wasted" money is whatever I pay to interest.

So my plan if I move is exactly what it sounds like: I sell the house and then buy a new one wherever I'm moving to. As long as I'm staying for like 5+ years at that location I think it's still worth it.

The purpose of a 30-year fixed mortgage is to build up equity in a home you otherwise couldn't afford. If OP moves, they now only have to take on a smaller mortgage for their new home and then keep paying that new mortgage off.

The goal is that by the time you reach retirement age, you have paid off the mortgage and own your home free and clear. Thus, you only have to pay the property taxes and have more financial security than someone who never built up equity because they always paid rent.

Furthermore, if you have children, that home is potentially a source of generational wealth. They can sell it after you pass and invest the proceeds, or live in it themselves if they want. Worst case, if you find you didn't save enough for retirement, you can tap into the home equity to keep food on the table, although this is not optimal.

Isn't the common use case that the equity in your home can be exchanged for elder care in your latter years?

Depends on the size of someone's nest egg. The goal should arguably be to use your other investments first.

I might. I've lived in it for pretty damn close to 20 years at this point.

Australia is practically all variable rates after 3 years, so not much is really "locked in"

You are overlooking the scenario where home prices fall. Yes, your monthly payments will be fixed, but your asset will be falling in value.

Reply on news.ycombinator.com