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.<p>I would argue expensive single family homes in supply restricted markets is a toxic product
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 <i>wish</i> 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.<p>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).<p>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!
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.<p>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.<p>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.
A lot of these "analyses" ignore one simple fact: you need to live somewhere.<p>The way I describe this is that you constantly have a 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.<p>So I view buying real estate as essentially canceling out your 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.<p>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.<p>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?<p>The lack of the 30 year mortgage would likely disproportionately affect poor people.<p>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).<p>But the 30 year mortgage? This feels like an attack on the most economically vulnerable to me.<p>EDIT: corrected "negative short" to "short".
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.<p>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.
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<p>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.
For housing to be solved, we need to reorganize society.<p>It's not a supply problem, it's a demand problem. Everybody want to live in the same dense hotspots, creating a perpetual upward pressure in local prices.<p>Not even the most powerful instrument, interest rates, solve this problem. You only need as many buyers as there is supply. It doesn't matter if 99% can't afford it, if 1% is enough to buy up the limited supply of houses, no matter the interest rate.<p>Not even a massive economic crash brings relief. Because the underlying demand is still there, and so is the limited supply. The temporary discount is usually not used (scared buyers) and most home owners just sit it out until prices inevitably come back. There isn't going to be a "houses now 50% off" moment, ever.<p>You can win a battle against NIMBY but it won't win the war. The demand keeps coming and supply cannot sustainably keep up.<p>Hence my simple take. You're trying to squeeze an infinite amount of people and buildings into a tiny space that is not infinite. Instead of doubling down on this idiotic idea, reorganize society.<p>There isn't going to be a "tweak" that fixes it. It cannot be fixed with this line of thinking. It requires new thinking.
> I expect rates vol to rise in the future, so I’d better be long gamma right now.<p>What have I done wrong in my life so I can no longer understand news articles?
That's a lot of analysis. I couldn't hang on that long because OP had so many arguments.<p>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.<p>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.<p>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.
It's only 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.)<p>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.
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".
Discussed at the time:<p><i>The 30-Year Mortgage Is an Intrinsically Toxic Product</i> - <a href="https://news.ycombinator.com/item?id=18829435" rel="nofollow">https://news.ycombinator.com/item?id=18829435</a> - Jan 2019 (126 comments)
Public housing, land value tax, and land dividend please.<p>All this garbage is pointlessly complex. Pricing owership is needlessly complex. Rent all the way down to dividends at the bottom, please.
This hit piece is typical of finance-bro screeds (and really, all
economic editorials) where up can be down and left can be right
depending on what you're promoting.