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Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when

Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?

mistermann 9y ago
Stretching as far as you can and then some has been the optimum strategy in Canada for a very long time now.
bluGill 9y ago
That depends. Location location location. The right answer changes based on what side of the city you live in. As such nobody can give a definitive answer. In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move. Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.
- aeorgnoieang 9y ago
  > Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
  - bluGill 9y ago
    Generally rational economics assumes someone who is rationally trying to optimizes for other factors. You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)
    - sjy 9y ago
      No such assumptions are made in the axioms of VNM-rationality[1] or any other model of rationality of which I am aware. If it is not rational to live near people you like it is difficult to see why it would be pay more for a house with any other luxury. [1]: https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utility_theorem https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utilit...
- nerfhammer 9y ago
  Strangling the growth of cities and labor mobility is very much a rational economic problem: * https://www.axios.com/sky-high-home-prices-are-thwarting-thwarting-economic-mobility-2466575966.html https://www.axios.com/sky-high-home-prices-are-thwarting-thw... * https://www.citylab.com/equity/2017/06/the-other-side-of-hard-to-build-cities/530310/ https://www.citylab.com/equity/2017/06/the-other-side-of-har... Cf. China, which has seen unbelievably explosive growth in its cities in the last 40 years and China has also seen ~1 billion people lifted out of poverty during exactly the same time period.
  - seanmcdirmid 9y ago
    Sure. This is inspite of the hukou system, which is basically a kind of apartheid that keeps rural migrants from receiving services in the urban locales they are working at.
astura 9y ago
Yes, I think so, but only because "as good as you can afford" usually means to people "as much money as the bank will loan me" instead of "as much as I have carefully budgeted." I bought as much as I could afford, but my budget included savings and a cushion. The bank would have loaned me plenty more than what my budget could afford. And my budget included repairs and maintenance. I also included in my budget a 4 bedroom house costs more than a 900 sqft town house to heat and cool. The big thing was I wasn't willing to give up maxing out our retirement accounts.
Dylan16807 9y ago
Especially when "good" means "big". The ability to pay for an 8 bedroom house does not imply that it's a good idea to buy one.
maxsilver 9y ago
In theory, sure. If there were ever any options to be careful, that might be relevant. But in practice, "as good as you can afford" really means "buy the lead paint, lead water, asbestos ridden, foundation broken 'cheap' house? Or buy the no-lead, no asbestos, no mold 'expensive' house? "As good as you can afford" actually translates to the "least shitty" option, for most people. Buying an 8 bedroom house just because the bank will technically let you, is a fun TV sitcom joke. Not a real thing most people are ever able to actually do.
- shostack 9y ago
  For many it is also tied to expectations of what they should be able to afford that are born out of what they saw their parents afford and what they grew up in. If you grew up in a modest but well-kept house in a decent neighborhood, that is your baseline. If you then go on to reach some level of success in your career such that you are roughly on par or exceeding your parents income, your expectation naturally is that you should be able to afford something similar or better. Unfortunately the market dynamics have completely shifted since parents bought, and so people are having to take a really harsh look at the reality of their past expectations and how they align with their current reality. It often means paying way more than they ever wanted or thought was necessary to buy something way crappier.
curun1r 9y ago
As good as you can afford would be fine. The problem is mortgages and the fact that people are buying more than they can afford. They're buying as much as they will be able to afford over the next 30 years. We've developed a system were some people make large amounts of money by creating the fiction that housing should be as expensive as it is. There's a lot of evidence that shows that for every dollar of loans made available to students, the price of education rises, and that's a system without supply/demand dynamics since admissions aren't (supposed to be) based on a bidding process. It seems only reasonable to conclude that the availability of mortgages has similarly increased the price of housing. It's a hidden cost of our housing market that banks (and a few others) profit by. The banks loan fictional money, created out of thin air thanks to fractional lending requirements, and collect a percentage of that back every year on a house that only costs what it does because of that loan. Without mortgages, people would be forced to save up and the price of housing would be governed more by the cost of actually constructing houses and the amount that people were able to save before buying rather than a percentage of their income over the next 30 years. Think, for example, if banks decided to change the standard loan time from 30 years to 40 years. What would happen to housing prices in areas with somewhat constrained supply? Homebuyers would still look at monthly payments and buy as much house as they could afford. So housing prices would increase accordingly and instead of mortgaging 30 years of our futures, we'd be mortgaging 40. We'd be buying the same houses and banks would be making more money. Change 30 years to 20 years and you'd get a similar drop in housing prices. More than any other thing that we spend money on these days, housing prices have been decoupled from their cost of production and banks are largely the ones skimming that difference between what housing should cost and what it actually costs.
collyw 9y ago
I have been waiting 10 years for "emergency" interest rates to rise and the subsequent price fall here in Europe. So far it hasn't happened.
- quickthrower2 9y ago
  Sweden might be for you then

mistermann 9y ago

Stretching as far as you can and then some has been the optimum strategy in Canada for a very long time now.

bluGill 9y ago

That depends. Location location location. The right answer changes based on what side of the city you live in. As such nobody can give a definitive answer. In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move. Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.

aeorgnoieang 9y ago
> Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
- bluGill 9y ago
  Generally rational economics assumes someone who is rationally trying to optimizes for other factors. You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)
  - sjy 9y ago
    No such assumptions are made in the axioms of VNM-rationality[1] or any other model of rationality of which I am aware. If it is not rational to live near people you like it is difficult to see why it would be pay more for a house with any other luxury. [1]: https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utility_theorem https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utilit...
nerfhammer 9y ago
Strangling the growth of cities and labor mobility is very much a rational economic problem: * https://www.axios.com/sky-high-home-prices-are-thwarting-thwarting-economic-mobility-2466575966.html https://www.axios.com/sky-high-home-prices-are-thwarting-thw... * https://www.citylab.com/equity/2017/06/the-other-side-of-hard-to-build-cities/530310/ https://www.citylab.com/equity/2017/06/the-other-side-of-har... Cf. China, which has seen unbelievably explosive growth in its cities in the last 40 years and China has also seen ~1 billion people lifted out of poverty during exactly the same time period.
- seanmcdirmid 9y ago
  Sure. This is inspite of the hukou system, which is basically a kind of apartheid that keeps rural migrants from receiving services in the urban locales they are working at.

astura 9y ago

Yes, I think so, but only because "as good as you can afford" usually means to people "as much money as the bank will loan me" instead of "as much as I have carefully budgeted." I bought as much as I could afford, but my budget included savings and a cushion. The bank would have loaned me plenty more than what my budget could afford. And my budget included repairs and maintenance. I also included in my budget a 4 bedroom house costs more than a 900 sqft town house to heat and cool. The big thing was I wasn't willing to give up maxing out our retirement accounts.

Dylan16807 9y ago

Especially when "good" means "big". The ability to pay for an 8 bedroom house does not imply that it's a good idea to buy one.

maxsilver 9y ago

In theory, sure. If there were ever any options to be careful, that might be relevant. But in practice, "as good as you can afford" really means "buy the lead paint, lead water, asbestos ridden, foundation broken 'cheap' house? Or buy the no-lead, no asbestos, no mold 'expensive' house? "As good as you can afford" actually translates to the "least shitty" option, for most people. Buying an 8 bedroom house just because the bank will technically let you, is a fun TV sitcom joke. Not a real thing most people are ever able to actually do.

shostack 9y ago
For many it is also tied to expectations of what they should be able to afford that are born out of what they saw their parents afford and what they grew up in. If you grew up in a modest but well-kept house in a decent neighborhood, that is your baseline. If you then go on to reach some level of success in your career such that you are roughly on par or exceeding your parents income, your expectation naturally is that you should be able to afford something similar or better. Unfortunately the market dynamics have completely shifted since parents bought, and so people are having to take a really harsh look at the reality of their past expectations and how they align with their current reality. It often means paying way more than they ever wanted or thought was necessary to buy something way crappier.

curun1r 9y ago

As good as you can afford would be fine. The problem is mortgages and the fact that people are buying more than they can afford. They're buying as much as they will be able to afford over the next 30 years. We've developed a system were some people make large amounts of money by creating the fiction that housing should be as expensive as it is. There's a lot of evidence that shows that for every dollar of loans made available to students, the price of education rises, and that's a system without supply/demand dynamics since admissions aren't (supposed to be) based on a bidding process. It seems only reasonable to conclude that the availability of mortgages has similarly increased the price of housing. It's a hidden cost of our housing market that banks (and a few others) profit by. The banks loan fictional money, created out of thin air thanks to fractional lending requirements, and collect a percentage of that back every year on a house that only costs what it does because of that loan. Without mortgages, people would be forced to save up and the price of housing would be governed more by the cost of actually constructing houses and the amount that people were able to save before buying rather than a percentage of their income over the next 30 years. Think, for example, if banks decided to change the standard loan time from 30 years to 40 years. What would happen to housing prices in areas with somewhat constrained supply? Homebuyers would still look at monthly payments and buy as much house as they could afford. So housing prices would increase accordingly and instead of mortgaging 30 years of our futures, we'd be mortgaging 40. We'd be buying the same houses and banks would be making more money. Change 30 years to 20 years and you'd get a similar drop in housing prices. More than any other thing that we spend money on these days, housing prices have been decoupled from their cost of production and banks are largely the ones skimming that difference between what housing should cost and what it actually costs.

collyw 9y ago

I have been waiting 10 years for "emergency" interest rates to rise and the subsequent price fall here in Europe. So far it hasn't happened.

quickthrower2 9y ago
Sweden might be for you then