[HN Gopher] The 30-Year Mortgage Is an Intrinsically Toxic Produ...
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The 30-Year Mortgage Is an Intrinsically Toxic Product (2019)
Author : vwoolf
Score : 42 points
Date : 2022-01-02 21:23 UTC (1 hours ago)
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| SavantIdiot wrote:
| That's a lot of analysis. I couldn't hang on that long because OP
| had so many arguments.
|
| However, something has to put the breaks on rising house costs
| like OP says, or we're heading back to pre-1930's where 60% of
| the population rented.
|
| OP is right, 30 year mortgages are a way to increase prices, like
| what's happening in car loans: 48 month used to be the norm
| (80's, 90's), but now I've seen 120 month loans. 10 years to pay
| off a car. Yeesh.
|
| Mortgage deduction elimination for non-primary residences is a
| start: that's gov't subsidy of investors. Once mortgage interest
| rates go back above 6% that might at least flatline prices
| instead of this crazy exponential.
| ARandomerDude wrote:
| I love the 30 year mortgage. I buy a home I couldn't afford in
| cash or with a substantially shorter term note, live in the house
| 2-4 years then sell it for a profit with no prepayment penalty.
| I've done that 4 times in a row each time being able to buy a
| house that's perfect for my family's needs at the moment.
|
| The real problems, in my opinion, are (1) people go all-in for
| their "forever home" only to discover most people don't stay that
| long, and (2) people view themselves as owners rather than future
| sellers. Understand your house is a leveraged investment and
| you'll do well.
| SilasX wrote:
| From the article:
|
| > For the individual, the fact that encouraging 30-year
| mortgages is a bad policy does not imply that getting one
| yourself is a bad deal.
| ramphastidae wrote:
| Moving your family every 2-4 years sounds awful. And unless you
| are moving to a lower COL area each time, you're reducing your
| purchasing power with each move because the prices for all the
| other houses went up too.
| SavantIdiot wrote:
| > Understand your house is a leveraged investment and you'll do
| well.
|
| Your primary house is not an investment, because if you sell it
| you are now homeless. This is literally the first thing any RIA
| or CFPA teaches you.
| Spooky23 wrote:
| I live in a house that I could afford to buy in cash and are in
| year 15 of a 30 year mortgage. That bet worked out for me vs
| getting a 20% rate premium for an ARM. For me, that meant
| living is a smaller market and limiting my upside.
|
| My aunt and uncle got into a pickle with this in the 80s. They
| were over-leveraged and underwater in a house in North Jersey.
| The house value crashed in the late 80s and their arm was going
| up a few points a year. My uncle was a bank officer and would
| lose his job if they went bankrupt. The job moved and he was
| forced to commute to some awful place without usury for a few
| years. It worked out in the long term but it was very
| difficult.
|
| It's hard for the average Joe to treat home like an investment.
| Timing is everything with investments and you always need a
| home.
| kerneloftruth wrote:
| Well done. My father was a realtor, and taught me early to
| distinguish between House and a Home -- the former is a
| physical thing, an investment, and is your Home while you're
| living in it; the latter is a precious concept, but a separate
| one. I'm grateful for him teaching that wisdom to me and my
| siblings when we were younger.
| jawns wrote:
| We passed on buying several houses that would have been
| perfect for our (somewhat unconventional) needs, but would
| have been very hard to sell.
|
| Instead, we bought a house that isn't perfect for our needs
| but will be easy to sell, because it has multiple in-demand
| features that don't really matter much to us, but matter to a
| large swath of buyers.
|
| Perfect example is a childless couple who can buy a house in
| either a good or bad school district, with commensurate taxes
| and property values. They might think they're getting a steal
| by going with the house in the bad district... until it's
| their turn to sell the house.
| jjoonathan wrote:
| Yes, it's the optimal strategy to exploit the idiotic game we
| play and get the best of the others trying to play it.
| Calling it "wisdom" seems a bit tasteless, though.
| beckman466 wrote:
| > distinguish between House and a Home -- the former is a
| physical thing, an investment
|
| so a 'house' is 'someone else's Home that you happen to
| profit from heavily'?
| kerneloftruth wrote:
| Some people own their home, others rent it. Different
| situations suit different people.
| [deleted]
| OnlineGladiator wrote:
| > Some people own their home, others rent it.
|
| You've already contradicted yourself. By calling it a
| home and renting it out, you've broken the distinction
| between a house and a home (the one you defined in your
| previous comment).
|
| > to distinguish between House and a Home -- the former
| is a physical thing, an investment, and is your Home
| while you're living in it
| beckman466 wrote:
| > Some people own their home, others rent it. Different
| situations suit different people.
|
| spoken like a true 'property investor'? if you are trying
| to tell me that you don't recommend your closest friends
| and family to buy their own houses, you've really not
| convinced me.
| leetcrew wrote:
| not GP, but I'd recommend buying to some friends/family
| and renting to others. it depends a lot on how long they
| plan to live there, the local price-to-rent ratio,
| tolerance for risk, and desire to make significant
| modifications to the structure. but I'd err on the side
| of renting.
| luckyscs wrote:
| Your buys happened to coincidence with the peaking of the
| housing demand in the US. Are you temporarily lucky or does
| this advice hold true for everyone forever?
| ARandomerDude wrote:
| How much good advice holds true for everyone forever?
|
| _Use this kind of stylus and don 't pick a fight with the
| Babylonians_ may have been great advice, even if it wasn't
| eternal.
| beckman466 wrote:
| > Understand your house is a leveraged investment and you'll do
| well.
|
| ugh there's truth to this but it just feels so fucking
| dystopic. within the current systems we're playing games of
| musical chairs and the people who do not 'win' have further and
| further to fall when they inevitably 'lose' due to rising
| inequality/increasing exploitation (gig economy/zero-hour-ing,
| union-busting etc.)
|
| i use quotes because nobody really wins when one of us loses.
| we have enough to satisfy the needs of every human.
| alkonaut wrote:
| From the perspective of my European 100 year mortgage, 30 year
| fixed seems it cuts down the prices in absolute terms which
| offloads the risk from the buyer a bit. I _wish_ there were laws
| limiting the length of mortgages to say 10 years. That would mean
| I had bought my house at 1 /10th the price and thus at 1/10th the
| risk.
|
| But the question is of course is a mortgage seen as someone
| "paying off" a house, or simply a rent to the bank? I never
| intended to purchase/repay my house. The 100 year home loan is
| how I rent and the bank is my landlord. I take a lot of the risk
| for changes in the market, but also obviously the reward too
| (unlike a normal rental setup).
|
| I do pay it back (1/100 per year) but obviously my horizon for
| living in the home isn't 100 years. It's both in mine and my
| banks interest that my mortgage is kept at some level which is
| less than "one bad dip below market value", or say 2/3 or 12 of
| current market value. Once there, I'd rather invest the money
| than pay back more on the mortgage. Especially if interest rates
| are (a deductible) 1.5% and low risk investment yields several
| times that!
| [deleted]
| brianwawok wrote:
| You can get an interest only mortgage in the US. Removes the
| illusion of paying it off. Functional, it would be very very
| close to a 100 year mortgage (few less dollars per month that
| goes to principle)..
|
| Remember though, for a big part of the US, paying off your
| mortgage is the most important / biggest form of retirement
| savings. Many people make it their goal to pay off their
| mortgage before they retire, even if their 401k is dry. With
| social security and modest lifestyle, it's not a terrible
| decision. You can even reverse mortgage if the well runs dry a
| few years early..
| Mc91 wrote:
| I normally don't talk to people much about real estate, house
| prices, mortgages etc., but the local real estate market has
| heated up a little so I have been talking about these things with
| people more.
|
| One thing I did not expect is how many banks have waived the 20%
| down payment rule. If you pay some mortgage insurance you can buy
| a home with less than 20%. I have talked with people who managed
| to ante up 20%, and some who bought without 20% down.
|
| In light of the not-so-distant 2008 subprime mortgage bailout,
| some of what is happening surprised me a little. Obviously, that
| this is happening would have the tendency to inflate real estate
| prices.
| cm2012 wrote:
| I just bought with 5% down, though I have good credit and
| income.
| burlesona wrote:
| The ability to pass less than 20% with PMI has been a thing for
| a long time... It was around before the 2008 crash and never
| went away afterwards. The bar to qualify for a mortgage went
| up, and has come back down some (though not all the way to
| pre-2008 levels), but PMI didn't really change AFAIK.
| ghaff wrote:
| I had a mortgage that had PMI for a time in the late 90s. (I
| could have afforded 20% but then I couldn't have afforded a
| bunch of improvements which the fixer-upper really needed.)
| Tagbert wrote:
| When we bought, we had enough for 15% down but could not reach
| 20%. Since we had to get mortgage insurance anyway, we were
| advised to just put 5% down and hold back the rest to cover
| moving expenses and setup for a new house. 5 years later we had
| paid off enough to refinance at a lower rate, shorter term, and
| without the PMI.
| onion2k wrote:
| Most young people don't earn even close to enough to save 20%
| of the cost of a house. Without those people (first time
| buyers) entering the market the entire market grinds to a halt
| as there's no one to buy on one end of a chain. The bank's
| mortgage businesses would collapse. They _had_ to start
| offering alternatives to down payments.
| closeparen wrote:
| How can it be that they earn enough to make the monthly
| payments, then?
| crooked-v wrote:
| They're already paying more than that much in rent. They
| just can't put together that _and_ 20% of the full (greatly
| inflated) valuation at the same time.
| closeparen wrote:
| Where? In the expensive coastal markets the price to rent
| ratio is enormous; the mortgage is much higher than the
| rent on the same home.
| cpursley wrote:
| Well, they're probably paying rent before buying. And in
| many places in the country a monthly mortgage plus tax and
| insurance payment comes out well under rent.
| tdfx wrote:
| Historically low interest rates. Also, the average
| percentage of household income allocated towards housing
| has been steadily increasing.
| [deleted]
| doovd wrote:
| Oh they earn enough to make monthly payments. They just
| happen to be paying someone else's mortgage, rather than
| their own.
| syshum wrote:
| No, with out those buyers the market could not support the
| MASSIVE increase in prices many multiples of inflation in
| some markets, they "HAD" to start offering alternatives or
| sellers would have to seek only reasonable profits on the
| sell instead of exorbitant profits... the horror
| onion2k wrote:
| People treat their house as a retirement fund, or just an
| investment. They won't sell at a loss. If prices go down
| they just won't sell, which would also make it impossible
| for bank's to sell mortgages to people buying. Buyers can't
| buy if there are no sellers. People have to keep buying
| houses _forever_ or the banking system will fail.
| syshum wrote:
| >>They won't sell at a loss. If prices go down they just
| won't sell,
|
| This is absolutely false. Many people have sold at a lost
| over the years for many reason including job relocation,
| family issues, bankruptcy, etc et etc
|
| That said Pricing going down != loss, for example I
| bought my current home 5 years ago, I bought it below
| market value, and after 5 years of value increases prices
| would have to drop more than 20% for me to sell it for
| less than I paid for it, and much more to "take a loss"
| if you calculate profit / loss properly factoring the
| value of shelter provided (which no one does)
|
| >>People treat their house as a retirement fund, or just
| an investment.
|
| That is a problem society has yes...
| worker767424 wrote:
| I'm in a bizarre place financially. I'm single, in the Bay
| Area, and work for a FAANG. I have enough saved for 40+% down
| for a lot of decent things, so I'm limited by my _salary,_
| not my down payment. It 's extra weird because RSUs don't
| necessarily count towards salary for mortgage purposes, but
| they're (for now) a significant chunk of my net pay.
|
| I'm also a little worried about putting a lot down because
| prices might go down when interest rates go up.
|
| I realize this isn't normal. Most people are somewhere
| cheaper, lots are married, and most have nowhere near as much
| cash.
| jtmarmon wrote:
| > It's extra weird because RSUs don't necessarily count
| towards salary for mortgage purposes, but they're (for now)
| a significant chunk of my net pay.
|
| Are you sure this is true? In my (admittedly limited)
| experience, the way it works is that the bank asks for your
| annual income and you have to provide proof of that, which
| you can do by providing a statement from the brokerage
| account your company vests your RSUs to. RSUs issued from
| your (presumably publicly traded) company are liquid, so
| you can pretty easily claim them as part of your annual
| income and get a mortgage against that income.
| jjoonathan wrote:
| > the entire market grinds to a halt
|
| By which you actually mean "prices come down to earth," which
| is a good thing, just one that many powerful interests don't
| want to happen because they have bet against it.
| colechristensen wrote:
| What it seems like is house pricing adjusts to be affordable
| for a similar number of people regardless of what you do.
| Give people bigger, longer term loans and you don't give more
| people access, you just make prices higher.
|
| What you need to do is remove the dead weight from the
| market: i.e. do things to reduce investors and mortgage
| writers siphoning money out of the economy. What this means
| is smaller, shorter term loans and taxes on commercial real
| estate lending and leased land and housing.
| cletus wrote:
| A lot of these "analyses" ignore one simple fact: you need to
| live somewhere.
|
| The way I describe this is that you constantly have a negative
| short position on the local real estate market. If rents go up,
| you lose. If house prices go up, you lose. If either goes down,
| you win. That's a short position.
|
| So I view buying real estate as essentially canceling out your
| negative short position. Think about it: if the local market
| moves, it largely doesn't affect you. You can argue if you're
| underwater, it's bad. It's not good but your actual liability
| tends to be limited, particularly in no recourse states. For
| those unfamiliar, no recourse states give the lender the option
| to foreclose on the property if it's in default or to go after
| you for the debt. They can't do both.
|
| The author claims mortgages trap the poor in bad investments. The
| counterargument to that is you give stability to those who are
| most likely to be priced out by rent hikes and forced to move.
| Efforts to avoid that (eg rent control) don't really solve
| anything and just create the same problems that incumbent home
| ownership does: first come, first served.
|
| The author bemoans the lack of labour market flexibility with
| higher home ownership. This is true but is it bad? You have to
| remember he's talking about the 1930s when people were destitute
| and were forced to chase work. Should this really be a policy
| goal?
|
| The lack of the 30 year mortgage would likely disproportionately
| affect poor people.
|
| Real estate does need reform. I think we need to stop allowing
| funds and the super-rich to park money in real estate. Cities
| should be for those who live in the city, not Russian oligarchs
| who are anonymously "investing" via a REIT. We also need to stop
| subsidizing ultra-luxury building as happens in NYC (eg 421a
| abatements).
|
| But the 30 year mortgage? This feels like an attack on the most
| economically vulnerable to me.
| amelius wrote:
| Lend people money so they have more to spend, and lo and behold,
| prices go up. But now you are in the same situation as before
| except you are in debt.
| SavantIdiot wrote:
| That's what happens without regulation (limits on the size of
| the loan) or inflationary controls (rate increases). Lending
| exists to help amortize the cost of a big-ticket purchase so
| that they can grow and have security, as a business or a
| person/family. But when you take away the guardrails you have
| runaway student loan and mortgage debt. At least with the
| latter there is an asset that has some value.
| kerneloftruth wrote:
| You just described the effects of he student loan industry,
| too.
| mkoubaa wrote:
| But rents go up even though the mortgage rate is locked in. In
| some markets a bad 30 year mortgage turns into a great deal 10
| years later.
|
| I would argue expensive single family homes in supply restricted
| markets is a toxic product
| klodolph wrote:
| The mortgage rate is locked in, but that doesn't save you--if
| you have a high mortgage rate the rates could go down (but
| you're locked in and can't benefit unless you refinance), if
| you have a low mortgage rate then the principal is higher.
| cammikebrown wrote:
| It's all bad. I'm not able to save up for a down payment, even
| if I wanted to buy a home (which I don't, I want to keep moving
| around places and I'd rather not worry about maintenance,
| property taxes, etc.) I feel bad for those who do want to buy
| and are priced out.
| Retric wrote:
| I personally move around enough that transaction costs from
| home ownership would have been larger than the rent I actually
| paid.
| leroman wrote:
| Two groups betting against each other - the one who is betting
| the prices go up (and buys houses) - the second who is staying
| out of the market claiming it's a bubble
|
| In the center, there's the interest rate, where the first group
| claims needs to stay low so they can win/survive, but if it does,
| the second group loses.
| pdonis wrote:
| While the author makes plenty of good observations, there is a
| huge elephant in the room that he leaves out: the main problem
| with mortgage loans currently is that the government prints money
| to fund them. I don't understand how the author could have a
| whole section on the lender's perspective that starts with the
| question "Who supplies the capital for mortgages, and what are
| they getting out of it?" and never give the obvious answer: "The
| government supplies it, and gets more political power out of it
| by making more institutions dependent on the government".
| xupybd wrote:
| I could only afford a 30 year term. Now I'm half way through my
| mortgage 5 years later. You don't have to stick to the original
| repayments.
| tkojames wrote:
| Very true I am taking the opposite bet. I refinanced last year
| 30 year 2.85 apr. In California so prop 13 means property taxes
| won't go up to fast. I have no plans to pay it off earlier. But
| we are kinda stuck we can sell our house for a nice profit on
| what I paid 5 years ago. Then I have to pay for another house
| that is expensive in the current marketing. Not really looking
| to relocate to cheaper place. So I am just hoping all the money
| I am putting in the stock market ends up being the right call.
| Who knows though. Either approach could be a good choice in the
| right situation.
| koheripbal wrote:
| You have to balance the returns of the market vs the cost of
| the mortgage. In many cases it makes more sense not to pay off
| the mortgage and just put excess cash into the market.
|
| I could pay off my mortgage at any time, but I've earned more
| by putting that cash in equities.
|
| I treat my 30 yr mortgage like a low interest loan. I basically
| take the risk that the mortgage lender doesn't want.
| sys_64738 wrote:
| The mental relief of paying off a mortgage is much greater
| than any mortgage repayment schedule. The day people pay off
| their mortgage and own it outright is up there with birth of
| kids.
| quitit wrote:
| It's only as toxic for people who don't do anything with it. Even
| in Australia where real estate prices are insane the average 30
| year loan is paid off in 14 years (note this is longer than
| earlier times.)
|
| Also the ability to refinance the loan can allow a person to take
| advantage of equity to either purchase additional properties or
| reduce their monthly dues. If the property is rented this can be
| the difference between the property requiring funds every month
| to one that makes the owner money every month - at which point it
| really doesn't matter what the duration of the loan is, because
| it's now producing income.
| Hackbraten wrote:
| > I expect rates vol to rise in the future, so I'd better be long
| gamma right now.
|
| What have I done wrong in my life so I can no longer understand
| news articles?
| SilasX wrote:
| The article's point there was that the average Joe's actions
| under the current mortgage system _could_ make sense, if they
| were based on a deep understanding of financial markets
| (including the subtleties of options trading) and were betting
| on increased volatility of interest rates.
|
| If the sentence doesn't make sense, that's arguable part of the
| point: the author wants you to react, "huh, average people
| don't think like that, so of course that's not a rational bet",
| which is his point.
|
| But if you want to understand the volatility/gamma dynamic and
| strategy the author is referring to, this gives some detail.
| I'll summarize it myself once I catch up and feel I understand
| it.
|
| https://seekingalpha.com/article/181382-option-strategy-long...
| barry-cotter wrote:
| This isn't a news article. It's a newsletter that targets
| people who care about finance and everything else, but
| definitely finance. Rates vol means volatility in rates of
| interest. Long gamma means has investements for which the
| thesis (bet) is that gamma will rise, whatever gamma is.
| ZephyrBlu wrote:
| Gamma is one of the greeks. They are used in finance to
| describe derivatives related to options.
|
| https://www.investopedia.com/terms/g/greeks.asp
| [deleted]
| michelpp wrote:
| "Policies designed to help low-income people build wealth
| actually trap them at the worst possible time."
|
| Is that the bug, or the feature?
| tehjoker wrote:
| When they get foreclosed on Black Rock or whoever is the
| popular financier of the day will just scoop them up.
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