8 ms·

The 30-Year Mortgage Is an Intrinsically Toxic Product

101 points by rchaudhary 8y ago

purplezooey 8y ago
Screw mortgages, I hate them too, but what are you going to do.
jmspring 8y ago
From the article: - A mortgage is a bet on the value of a specific home - It’s a bet on local real-estate prices - A mortgage is a bet on interest rates, but it’s an esoteric one All three make massive assumptions (read the article). For me, there is something much simpler: - the thirty year mortgage was to lock in housing at a fixed price (barring property taxes and utilities/etc) at a fixed price where I am paying into eventual ownership The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates. If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked. This article spends too much time attacking a mortgage product that applies to pretty much any other mortgage, but those (like X/1 ARM mortgages) have bigger risks. In reality - one must guage their intent (flip/keep for period of time/never sell) and choose the product accordingly.
- closeparen 8y ago
  >The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates This fact is one of the central themes of the article. >If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked. Another central theme is that the housing and labor markets are highly related. Homeowners are least able to relocate for opportunity when it is most important to do so.
- isoskeles 8y ago
  Yeah, I thought this article was going to focus on something else, like how ridiculous a 30-year loan is in comparison to a 15-year. Somewhat informative either way, but really I feel like I learned more about Fannie and Freddie than why the 30-year is toxic, which I have my own reasons for believing.
  - jerkstate 8y ago
    I just bought a house and compared, for the same loan amount, the difference between a higher monthly payment (for a 15 year loan) versus a lower monthly payment (for a 30 year loan) and investing the difference between the 15 and 30 year payment at 8% annual return, and the 30 year approach came out way ahead because of the additional compounding investment return from those first 15 years. if the apr is significantly lower (4.75% vs 8%) than the expected annual investment return, it's kind of a no brainer, isn't it?
    - vageli 8y ago
      Where are you getting consistent 8% returns year over year though?
      - AdamM12 8y ago
        My best guess would be the long term returns of the S&P 500 is 7-8%. If you look at the returns relative to inception date 1993 SPY is like 9%. [1] https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY
      - jerkstate 8y ago
        I meant average return over 30 years, not necessarily 8% consistent every year. https://www.bogleheads.org/blog/three-fund-portfolio-returns/ https://www.bogleheads.org/blog/three-fund-portfolio-returns... https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysis...
        toomuchtodo 8y ago
        Jack Bogle, Blackrock, and other knowledgeable market participants are predicting lower future returns into the future (~4%) for a variety of reasons (structural, global and domestic growth that won’t be repeated), muting any arbitrage benefit between your mortgage rate and investment market returns. History will show (IMHO) homeowners should’ve just applied more towards their mortgage principal, and thrown solar on their roof if they could from a risk adjusted returns perspective (both “investments” I list are guaranteed, whereas the equities and non-US treasuries bond market is not).
- Gibbon1 8y ago
  I read some of it, he implies blame against 30 year mortgages for the 2008 financial crisis. When the reality is blame lies with exotic and adjustable rate mortgages, collateralization, corruption of the rating and underwriting industries, and political failure[1] And you are correct, the vast number of 30 year mortgages don't last ten years much less 30. The author also skips over that 5 year mortgages that existed previously were interest only and could be called in at any time. Worse the lender could require payment in gold or cash, whichever was higher. You want toxic, that's toxic. [1] Banks which are purely virtual organizations were 'saved' while families were physically thrown onto the street.
  - jmspring 8y ago
    I read through more of it after my comment. The real issue / culprit was the creative ways to get people into homes that could not afford them realistically - be it ARMs or X-year fixed loans.
    - Gibbon1 8y ago
      Not being able to afford a home has everything to do with stagnant wages and asset inflation. That's a policy choice our society has made. Exotic mortgages and corrupt underwriting was just trying to paper over that.
- jobeirne 8y ago
  You obviously didn't read the whole article because he explicitly covers refinancing during favorable rate changes - he has a whole section on 30yrs basically being implicit long vol trades on rates.
nartz 8y ago
One of the main values in a mortgage is that money is worth less in the future due to inflation, so over time the mortgage payment actually gets cheaper. Similarly, mortgages can often be cheaper than the alternative of paying rent, and are incentivized by allowing interest deduction.
- andrew_ 8y ago
  An excellent point often overlooked. A mortgage is also a great way to leverage debt and do more with money during the near term, over the full term of the note.
- AdamM12 8y ago
  That and also I'm going to have to be pay to live somewhere so would I rather put my money towards an asset I control or give it to someone else for their asset?
  - mehrdadn 8y ago
    This can't be the full picture. If your rent were $0.01/year would you still use this argument? No? What if your monthly rent was $0.01 less than your equivalent monthly mortgage payment? Yes, right? So at what point does the decision flip? That point is where it's worth it for you to pay rent without ever owning anything.
    - AdamM12 8y ago
      I don't think this a good analysis of the cashflows. My rent for a similar asset, lets say a 1k sq/ft 3 bed SFH, would have to be significantly cheaper since my house can appreciate in value while sticking to a fixed mortgage who's effective costs go down due to inflation not including that my landlord is going to (if smart) increase my rent each year. This situation is highly unlikely due to the fact that the person who owns the asset is likely using leverage and thus needs to make money to cover their costs which if anything are going to be higher than mine since the cost of capital for a 30 year mortgage on a 2nd home is always higher than primary residences.
evancox100 8y ago
"You don’t see financial advisors telling bacon lovers to hedge their next thirty years of breakfast consumption with a rolling long position in lean hogs." No, but don't let them read this or they might start!
ProfessorLayton 8y ago
There’s too many assumptions made in this article. Not all mortgages are speculative, many just want a place to live where they’re not subject to a landlord and all the rules that come with it, even if they don’t stay for the full 30y term. For those that are willing or able to stay the full 30y, the nominal mortgage payment will be the same, while the value of the dollar will not — inflation will work in your favor. The tax laws have also been recently doubled to ~24k for couples, and most home purchasers will not be running into the mortgage interest deduction judging by the median home value in the US.
andreygrehov 8y ago
Don't people want to own a place when they are 60?
- closeparen 8y ago
  Probably not the same place as when they're 30. When you're no longer working and the kids are grown, school system and job market become irrelevant. It becomes physically harder to care for each sqft, and with a smaller household you need fewer of them. As you lose the ability to drive safely, walkability becomes much more important. When I'm 60 I want to have the wealth to meet my new housing needs. That could be a previous house to sell. It could also be stock portfolio to liquidate or passive income sufficient to cover rent.
pxeboot 8y ago
Cheap, easy credit is one of the reasons housing prices have been able to climb so high. I wouldn't be surprised if 40-year loans become more common in the future to allow for further increases.
- akvadrako 8y ago
  Why not infinite year loans like in some countries? Basically you just cover the interest and gamble that by the time you sell it the price has increased.
  - mertd 8y ago
    If you're in a rent controlled market like SF, there is no reason to take on that risk. Just rent.
AdamM12 8y ago
> "If anything, our policy should do the opposite of what the GSEs promote: if you have a low income, and you try to borrow money to buy a house near where you work, there should be a surtax to discourage this bad diversification. There are other savings vehicles that don’t closely correlate with your income; buy those instead!" I think this is my favorite line. Let's tax the poor more for living close to where they work.
- AnimalMuppet 8y ago
  Broader, let's tax behavior we think is financially unwise - for the good of those too dumb to see how financially unwise the behavior is. The author can take their condescending smugness and get lost.
- michaelmrose 8y ago
  My head almost exploded when I read this. On the one hand you have a bunch of landlords which are incentivized to squeeze the poor for all their worth while looking for a reason to exclude anyone with financial challenges in their past including the massive number that correlate not with poor decisions but with ill health. Then you have terrible people calling for taxes on the poor to tax them out of houses because they think its a bad risk and subsequently into the hands of the landlords if and only if they will have them otherwise I guess they can go sit on the corner. I'm goddamn disgusted.
- closeparen 8y ago
  When the last employers pack up and leave the industrial heartland, all those mortgages are going to be deep underwater, and all those workers are going to be locked in places with no work. Many already are (see: Flint, MI). I hope you are prepared to pay their living expenses in perpetuity.
walrus01 8y ago
One of the interesting things about the Canadian mortgage market is that there is no such thing as a 20, 25 or 30 year fixed mortgage. The longest term ever offered is 5 years. Amortization periods can be 10, 15, 20 or 25 years, but you need to renegotiate at maximum every 5 years. In general the interest rates are highest for fixed 5-year mortgages, 1 and 2 years are lowest. There is absolutely no practical way in Canada to lock in a mortgage for long term fixed interest rates beyond 5 years. This has previously had interesting effects, such as in the early 1980s when people who owned their homes, had existing mortgages come up for renewal and encountered the new 18% interest rates. Either resulting in serious financial hardship or fire-sale quick sales because they could no longer afford to service the mortgage. Some people are currently getting mortgages which are fully ARM and hoping things maintain the status quo. The CMHC, federal agency which sells mandatory mortgage insurance for high-ratio loans, recently implemented a new stress test. https://jacquiebushell.ca/2017-mortgage-rules-changes-explained/ https://jacquiebushell.ca/2017-mortgage-rules-changes-explai... Not to say that Canada wasn't significantly affected by the 2008-2009 financial crisis. But much stronger and stricter banking regulations meant that the domestic big-5 banks' exposure to low-quality American mortgage products was lower. And there were much fewer no-doc/no-income/poor-quality mortgages created for Canadian properties. There was definitely no domestic equivalent to Countrywide or Washington Mutual's massive tranches of shit mortgages and mortgage backed securities.
- rootusrootus 8y ago
  Forced adjustable rate mortgages? That's seriously unfriendly to consumers. Wow, Canada.
  - jen20 8y ago
    > There is absolutely no practical way in Canada to lock in a mortgage for long term fixed interest rates The UK is exactly the same. 5 years is actually pretty long in the UK at the moment, 2-3 years fixed then variable is common. It doesn't seem to harm house prices.
  - arkem 8y ago
    It's the same in Australia, New Zealand, UK and probably other places too. 30 year fixed rate mortgages are probably the exception rather than the rule in most places.
snowwrestler 8y ago
This article strikes me as a classic example of a smart person outthinking themselves on something pretty basic. Sure, it makes for an interesting analysis. But the measured reality is that home ownership is strongly correlated with wealth, and the only way for someone who is not already wealthy to own a home is to borrow a lot of money to buy one. And the only way to get the monthly payments down is to extend the payback term. Hence: the 30 year mortgage.
- nikkwong 8y ago
  Ugh! Absolutely. The 30 year mortgage as a product was born out of the Great Depression. Back then, home ownership was the main path to wealth, but there was no liquidity in the housing market and bullet loans were reamortized every 5 years, which worked, until capital markets froze and there were no loans available. At that point, people foreclosed because there were no mortgage choices at their term end. The 30 year mortgage was a direct response to that. A 30 year mortgage guarantees that you can get a loan at an affordable rate and not have to be exposed to market liquidity for mortgage re-issuance. In that sense, the 30 year fixed has allowed normal people to build wealth that they otherwise wouldn't have been able to!
  - graeme 8y ago
    Why do you say homeowning was the path to wealth?
    - toomuchtodo 8y ago
      Guaranteed appreciation of an asset you have to acquire (for shelter) along with forced savings (principal component of monthly payments).
      - jackvalentine 8y ago
        Guaranteed appreciation?
        8y ago
nobodyandproud 8y ago
Home ownership was a way to stabilize finances, by providing a way to create a known cost for the average person over the long term. Banks made stable money through interest, and to offset the risks of foreclosure the banks quantified the risk based on income, etc. It worked very, very well. As an added benefit to the average person: The interest paid on the mortgage is tax deductible, and the 30 year mortgage offers the biggest benefit. More in this in a moment. The article then goes into 2008's crisis, but this a bad example. he barriers that prevented investment banks from commercial-bank activities (Glass Steagall) were completely wiped out. It took only 9 years (really, just 7) for that mistake to completely up-end our economy. Now back to the interest deduction: There is now a movement to remove this benefit. Both Republicans and Democrats see this as a windfall for more tax money. This is another article trying in a round-about way to sabotage the middle-class' only real tax deduction.
- rootusrootus 8y ago
  At this point the interest deduction is largely gone, at least to my understanding. The majority of homeowners will now find that the standard deduction is better than deducting mortgage interest. Especially married couples.
  - deleted 8y ago
    [deleted]
  - nobodyandproud 8y ago
    It depends on the value of the house, how much in charitable donations you gave, etc. A married couple at the upper-end of the mortgage interest cap who also provides donations can still exceed the $24,000 cap. Finally, I believe the boosted standard deduction expires in 2025.
matthewaveryusa 8y ago
After you pay your loan off you no longer need to pay rent, and while you're paying your loan you don't pay rent. Author completely missed that point. You need significant income and housing depreciation to come out behind when you factor those two in. In fact for my situation, even if my house depreciates to 1/3rd what I paid I'll still be coming out ahead due to paying less than I ever did for rent.
- njarboe 8y ago
  If you want to move that 6% realtor cut is pretty nasty. A year or two of rent right there.
- twiceaday 8y ago
  You'd be coming out ahead compared to renting _and_ putting the house downpayment into a checking account, which nobody would ever do.
- mrep 8y ago
  You still need to pay property taxes though which are based on your properties value. The real benefit in my opinion is that it locks you into a permanent shelter price so that you can live someplace long term without getting priced out and if the value of your home skyrockets causing your variable price property taxes to skyrocket (california not included due to prop 13), you can sell it and make a bunch of money and then move somewhere cheaper.
- closeparen 8y ago
  After investing in equities for 30 years with the savings from renting vs. buying, you will also be sitting on a huge chunk of value.
  - kuhhk 8y ago
    If I read that correctly, it sounds like you’re assuming that rent is lower than buying, which is not true in many places (including my own city). Many people buy rental properties because they can charge hundreds more dollars...
jfoutz 8y ago
This is a great article worth reading. I found myself walking around my apartment having a conversation with my imaginary version of the author. There are at least four points that i would quibble over. That said, i like the analysis. In spite of (imho) flawed foundations it's a solid argument. Does it capture the whole truth? I'd say no. Does it highlight a significant set of factors? absolutely. Spend the 15 minutes, charitably read the article, decide if it's worth spending another hour picking apart the argument and the analysis. This is one that probably isn't right, but points in the direction of truth. I think the foundations are shakey, but the structure is pretty good. Fun read.
- sjg007 8y ago
  What is shaky about the foundations? He seems like he covered all the bases here.
epx 8y ago
One of the 10 best articles ever published here.
C4stor 8y ago
It's really disappointing when people keep thinking of important life decisions as purely economical ones. No, I didn't buy a house because it's an "investment". I bought a house because I wanted the freedom to modify the place I live, adapt it to my family needs. You know, feel at home ! When I rent, I'm simply not allowed to do the amount of modifications I want to a place, and it just doesn't have the same feeling. Thinking every single act of life in terms of economy is being blind, and blaming people for doing non economically rational decisions bemuse me. Because for me, the endgame is not hoarding money, it's spending it to live the life I want. And just because one value economic rationality very much doesn't mean we all have too. Which is why there are still some very silly people donating to charities (the fools !). Kudos to politicians to sometimes have policies which make it easier to live a nice life, even if "the market" hates it. So no, the 30 year mortgage is not a "toxic product", it's a good way to allow a lot of people to go in a life path that is very appealing to a vast amount of humans.
lucas_membrane 8y ago
Isn't the focus on the 30-year fixed rate mortgage at least a little bit narrow in analyzing what happened during last decade's financial crisis? There were all kinds of negative amortization and adjustable interest loans being pushed, and I recall reading that high-leverage mortgages, not sub-prime, were where the defaults were greatest. My idea is that local governments should play a role in regulating mortgages because defaults, foreclosures, and abandoned property have serious consequences for neighborhoods and municipalities. Counties should have and exercise a right to refuse to register liens attributable to pathological lending likely to cause local economic hardship.
anonu 8y ago
The mortgage concept in the US is the ticket to the American dream. It is designed to give you essentially free money over the life of the mortgage by leveraging yourself with a loan that very few people would give you for any other investment decision. Not taking advantage of buying a house in America is a big mistake. Sure, there are plenty of pitfalls along the way, market timing can be important, location matters, etc.. but on average you are way way better off after ten years, ceteris paribus, versus someone who did not buy.
faissaloo 8y ago
The duration of the mortage is irrelevent, mortages themselves are intrinsically toxic.
sys_64738 8y ago
Renting V owning can be summarized by the following points 1) you have an asset at the end of the mortgage you can sell 2) after the mortgage is ended you have a place to live rent free in your old age Contrast to renting where you never own the place you rent and you will have to rent in your old age. Sure, you might default on the mortgage but it’s a long processed to be foreclosed. Contrast to being evicted from rent not being paid. Both have issues on default but your chances of staying put are better for mortgaged house.
nateburke 8y ago
Does anyone on this thread currently know what the current industry S.O.P. for calculating the option-adjusted spread (OAS) on agency MBS? Back when I was doing it in 2012, Monte Carlo simulation was still the gold standard, as far as I could tell.
Simulacra 8y ago
We own two rental houses and our townhouse on 30 year fixed. We are interested in building a property portfolio so for us it’s a perfect fit.

101 points by rchaudhary 8y ago

Screw mortgages, I hate them too, but what are you going to do.

From the article: - A mortgage is a bet on the value of a specific home - It’s a bet on local real-estate prices - A mortgage is a bet on interest rates, but it’s an esoteric one All three make massive assumptions (read the article). For me, there is something much simpler: - the thirty year mortgage was to lock in housing at a fixed price (barring property taxes and utilities/etc) at a fixed price where I am paying into eventual ownership The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates. If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked. This article spends too much time attacking a mortgage product that applies to pretty much any other mortgage, but those (like X/1 ARM mortgages) have bigger risks. In reality - one must guage their intent (flip/keep for period of time/never sell) and choose the product accordingly.

closeparen 8y ago
>The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates This fact is one of the central themes of the article. >If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked. Another central theme is that the housing and labor markets are highly related. Homeowners are least able to relocate for opportunity when it is most important to do so.
isoskeles 8y ago
Yeah, I thought this article was going to focus on something else, like how ridiculous a 30-year loan is in comparison to a 15-year. Somewhat informative either way, but really I feel like I learned more about Fannie and Freddie than why the 30-year is toxic, which I have my own reasons for believing.
- jerkstate 8y ago
  I just bought a house and compared, for the same loan amount, the difference between a higher monthly payment (for a 15 year loan) versus a lower monthly payment (for a 30 year loan) and investing the difference between the 15 and 30 year payment at 8% annual return, and the 30 year approach came out way ahead because of the additional compounding investment return from those first 15 years. if the apr is significantly lower (4.75% vs 8%) than the expected annual investment return, it's kind of a no brainer, isn't it?
  - vageli 8y ago
    Where are you getting consistent 8% returns year over year though?
    - AdamM12 8y ago
      My best guess would be the long term returns of the S&P 500 is 7-8%. If you look at the returns relative to inception date 1993 SPY is like 9%. [1] https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY
    - jerkstate 8y ago
      I meant average return over 30 years, not necessarily 8% consistent every year. https://www.bogleheads.org/blog/three-fund-portfolio-returns/ https://www.bogleheads.org/blog/three-fund-portfolio-returns... https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysis...
      - toomuchtodo 8y ago
        Jack Bogle, Blackrock, and other knowledgeable market participants are predicting lower future returns into the future (~4%) for a variety of reasons (structural, global and domestic growth that won’t be repeated), muting any arbitrage benefit between your mortgage rate and investment market returns. History will show (IMHO) homeowners should’ve just applied more towards their mortgage principal, and thrown solar on their roof if they could from a risk adjusted returns perspective (both “investments” I list are guaranteed, whereas the equities and non-US treasuries bond market is not).
Gibbon1 8y ago
I read some of it, he implies blame against 30 year mortgages for the 2008 financial crisis. When the reality is blame lies with exotic and adjustable rate mortgages, collateralization, corruption of the rating and underwriting industries, and political failure[1] And you are correct, the vast number of 30 year mortgages don't last ten years much less 30. The author also skips over that 5 year mortgages that existed previously were interest only and could be called in at any time. Worse the lender could require payment in gold or cash, whichever was higher. You want toxic, that's toxic. [1] Banks which are purely virtual organizations were 'saved' while families were physically thrown onto the street.
- jmspring 8y ago
  I read through more of it after my comment. The real issue / culprit was the creative ways to get people into homes that could not afford them realistically - be it ARMs or X-year fixed loans.
  - Gibbon1 8y ago
    Not being able to afford a home has everything to do with stagnant wages and asset inflation. That's a policy choice our society has made. Exotic mortgages and corrupt underwriting was just trying to paper over that.
jobeirne 8y ago
You obviously didn't read the whole article because he explicitly covers refinancing during favorable rate changes - he has a whole section on 30yrs basically being implicit long vol trades on rates.

nartz 8y ago

One of the main values in a mortgage is that money is worth less in the future due to inflation, so over time the mortgage payment actually gets cheaper. Similarly, mortgages can often be cheaper than the alternative of paying rent, and are incentivized by allowing interest deduction.

andrew_ 8y ago
An excellent point often overlooked. A mortgage is also a great way to leverage debt and do more with money during the near term, over the full term of the note.
AdamM12 8y ago
That and also I'm going to have to be pay to live somewhere so would I rather put my money towards an asset I control or give it to someone else for their asset?
- mehrdadn 8y ago
  This can't be the full picture. If your rent were $0.01/year would you still use this argument? No? What if your monthly rent was $0.01 less than your equivalent monthly mortgage payment? Yes, right? So at what point does the decision flip? That point is where it's worth it for you to pay rent without ever owning anything.
  - AdamM12 8y ago
    I don't think this a good analysis of the cashflows. My rent for a similar asset, lets say a 1k sq/ft 3 bed SFH, would have to be significantly cheaper since my house can appreciate in value while sticking to a fixed mortgage who's effective costs go down due to inflation not including that my landlord is going to (if smart) increase my rent each year. This situation is highly unlikely due to the fact that the person who owns the asset is likely using leverage and thus needs to make money to cover their costs which if anything are going to be higher than mine since the cost of capital for a 30 year mortgage on a 2nd home is always higher than primary residences.

evancox100 8y ago

"You don’t see financial advisors telling bacon lovers to hedge their next thirty years of breakfast consumption with a rolling long position in lean hogs." No, but don't let them read this or they might start!

ProfessorLayton 8y ago

There’s too many assumptions made in this article. Not all mortgages are speculative, many just want a place to live where they’re not subject to a landlord and all the rules that come with it, even if they don’t stay for the full 30y term. For those that are willing or able to stay the full 30y, the nominal mortgage payment will be the same, while the value of the dollar will not — inflation will work in your favor. The tax laws have also been recently doubled to ~24k for couples, and most home purchasers will not be running into the mortgage interest deduction judging by the median home value in the US.

andreygrehov 8y ago

Don't people want to own a place when they are 60?

closeparen 8y ago
Probably not the same place as when they're 30. When you're no longer working and the kids are grown, school system and job market become irrelevant. It becomes physically harder to care for each sqft, and with a smaller household you need fewer of them. As you lose the ability to drive safely, walkability becomes much more important. When I'm 60 I want to have the wealth to meet my new housing needs. That could be a previous house to sell. It could also be stock portfolio to liquidate or passive income sufficient to cover rent.

pxeboot 8y ago

Cheap, easy credit is one of the reasons housing prices have been able to climb so high. I wouldn't be surprised if 40-year loans become more common in the future to allow for further increases.

akvadrako 8y ago
Why not infinite year loans like in some countries? Basically you just cover the interest and gamble that by the time you sell it the price has increased.
- mertd 8y ago
  If you're in a rent controlled market like SF, there is no reason to take on that risk. Just rent.

AdamM12 8y ago

> "If anything, our policy should do the opposite of what the GSEs promote: if you have a low income, and you try to borrow money to buy a house near where you work, there should be a surtax to discourage this bad diversification. There are other savings vehicles that don’t closely correlate with your income; buy those instead!" I think this is my favorite line. Let's tax the poor more for living close to where they work.

AnimalMuppet 8y ago
Broader, let's tax behavior we think is financially unwise - for the good of those too dumb to see how financially unwise the behavior is. The author can take their condescending smugness and get lost.
michaelmrose 8y ago
My head almost exploded when I read this. On the one hand you have a bunch of landlords which are incentivized to squeeze the poor for all their worth while looking for a reason to exclude anyone with financial challenges in their past including the massive number that correlate not with poor decisions but with ill health. Then you have terrible people calling for taxes on the poor to tax them out of houses because they think its a bad risk and subsequently into the hands of the landlords if and only if they will have them otherwise I guess they can go sit on the corner. I'm goddamn disgusted.
closeparen 8y ago
When the last employers pack up and leave the industrial heartland, all those mortgages are going to be deep underwater, and all those workers are going to be locked in places with no work. Many already are (see: Flint, MI). I hope you are prepared to pay their living expenses in perpetuity.

walrus01 8y ago

One of the interesting things about the Canadian mortgage market is that there is no such thing as a 20, 25 or 30 year fixed mortgage. The longest term ever offered is 5 years. Amortization periods can be 10, 15, 20 or 25 years, but you need to renegotiate at maximum every 5 years. In general the interest rates are highest for fixed 5-year mortgages, 1 and 2 years are lowest. There is absolutely no practical way in Canada to lock in a mortgage for long term fixed interest rates beyond 5 years. This has previously had interesting effects, such as in the early 1980s when people who owned their homes, had existing mortgages come up for renewal and encountered the new 18% interest rates. Either resulting in serious financial hardship or fire-sale quick sales because they could no longer afford to service the mortgage. Some people are currently getting mortgages which are fully ARM and hoping things maintain the status quo. The CMHC, federal agency which sells mandatory mortgage insurance for high-ratio loans, recently implemented a new stress test. https://jacquiebushell.ca/2017-mortgage-rules-changes-explained/ https://jacquiebushell.ca/2017-mortgage-rules-changes-explai... Not to say that Canada wasn't significantly affected by the 2008-2009 financial crisis. But much stronger and stricter banking regulations meant that the domestic big-5 banks' exposure to low-quality American mortgage products was lower. And there were much fewer no-doc/no-income/poor-quality mortgages created for Canadian properties. There was definitely no domestic equivalent to Countrywide or Washington Mutual's massive tranches of shit mortgages and mortgage backed securities.

rootusrootus 8y ago
Forced adjustable rate mortgages? That's seriously unfriendly to consumers. Wow, Canada.
- jen20 8y ago
  > There is absolutely no practical way in Canada to lock in a mortgage for long term fixed interest rates The UK is exactly the same. 5 years is actually pretty long in the UK at the moment, 2-3 years fixed then variable is common. It doesn't seem to harm house prices.
- arkem 8y ago
  It's the same in Australia, New Zealand, UK and probably other places too. 30 year fixed rate mortgages are probably the exception rather than the rule in most places.

snowwrestler 8y ago

This article strikes me as a classic example of a smart person outthinking themselves on something pretty basic. Sure, it makes for an interesting analysis. But the measured reality is that home ownership is strongly correlated with wealth, and the only way for someone who is not already wealthy to own a home is to borrow a lot of money to buy one. And the only way to get the monthly payments down is to extend the payback term. Hence: the 30 year mortgage.

nikkwong 8y ago
Ugh! Absolutely. The 30 year mortgage as a product was born out of the Great Depression. Back then, home ownership was the main path to wealth, but there was no liquidity in the housing market and bullet loans were reamortized every 5 years, which worked, until capital markets froze and there were no loans available. At that point, people foreclosed because there were no mortgage choices at their term end. The 30 year mortgage was a direct response to that. A 30 year mortgage guarantees that you can get a loan at an affordable rate and not have to be exposed to market liquidity for mortgage re-issuance. In that sense, the 30 year fixed has allowed normal people to build wealth that they otherwise wouldn't have been able to!
- graeme 8y ago
  Why do you say homeowning was the path to wealth?
  - toomuchtodo 8y ago
    Guaranteed appreciation of an asset you have to acquire (for shelter) along with forced savings (principal component of monthly payments).
    - jackvalentine 8y ago
      Guaranteed appreciation?
      - 8y ago

nobodyandproud 8y ago

Home ownership was a way to stabilize finances, by providing a way to create a known cost for the average person over the long term. Banks made stable money through interest, and to offset the risks of foreclosure the banks quantified the risk based on income, etc. It worked very, very well. As an added benefit to the average person: The interest paid on the mortgage is tax deductible, and the 30 year mortgage offers the biggest benefit. More in this in a moment. The article then goes into 2008's crisis, but this a bad example. he barriers that prevented investment banks from commercial-bank activities (Glass Steagall) were completely wiped out. It took only 9 years (really, just 7) for that mistake to completely up-end our economy. Now back to the interest deduction: There is now a movement to remove this benefit. Both Republicans and Democrats see this as a windfall for more tax money. This is another article trying in a round-about way to sabotage the middle-class' only real tax deduction.

rootusrootus 8y ago
At this point the interest deduction is largely gone, at least to my understanding. The majority of homeowners will now find that the standard deduction is better than deducting mortgage interest. Especially married couples.
- deleted 8y ago
  [deleted]
- nobodyandproud 8y ago
  It depends on the value of the house, how much in charitable donations you gave, etc. A married couple at the upper-end of the mortgage interest cap who also provides donations can still exceed the $24,000 cap. Finally, I believe the boosted standard deduction expires in 2025.

matthewaveryusa 8y ago

After you pay your loan off you no longer need to pay rent, and while you're paying your loan you don't pay rent. Author completely missed that point. You need significant income and housing depreciation to come out behind when you factor those two in. In fact for my situation, even if my house depreciates to 1/3rd what I paid I'll still be coming out ahead due to paying less than I ever did for rent.

njarboe 8y ago
If you want to move that 6% realtor cut is pretty nasty. A year or two of rent right there.
twiceaday 8y ago
You'd be coming out ahead compared to renting _and_ putting the house downpayment into a checking account, which nobody would ever do.
mrep 8y ago
You still need to pay property taxes though which are based on your properties value. The real benefit in my opinion is that it locks you into a permanent shelter price so that you can live someplace long term without getting priced out and if the value of your home skyrockets causing your variable price property taxes to skyrocket (california not included due to prop 13), you can sell it and make a bunch of money and then move somewhere cheaper.
closeparen 8y ago
After investing in equities for 30 years with the savings from renting vs. buying, you will also be sitting on a huge chunk of value.
- kuhhk 8y ago
  If I read that correctly, it sounds like you’re assuming that rent is lower than buying, which is not true in many places (including my own city). Many people buy rental properties because they can charge hundreds more dollars...

jfoutz 8y ago

This is a great article worth reading. I found myself walking around my apartment having a conversation with my imaginary version of the author. There are at least four points that i would quibble over. That said, i like the analysis. In spite of (imho) flawed foundations it's a solid argument. Does it capture the whole truth? I'd say no. Does it highlight a significant set of factors? absolutely. Spend the 15 minutes, charitably read the article, decide if it's worth spending another hour picking apart the argument and the analysis. This is one that probably isn't right, but points in the direction of truth. I think the foundations are shakey, but the structure is pretty good. Fun read.

sjg007 8y ago
What is shaky about the foundations? He seems like he covered all the bases here.

epx 8y ago

One of the 10 best articles ever published here.

C4stor 8y ago

It's really disappointing when people keep thinking of important life decisions as purely economical ones. No, I didn't buy a house because it's an "investment". I bought a house because I wanted the freedom to modify the place I live, adapt it to my family needs. You know, feel at home ! When I rent, I'm simply not allowed to do the amount of modifications I want to a place, and it just doesn't have the same feeling. Thinking every single act of life in terms of economy is being blind, and blaming people for doing non economically rational decisions bemuse me. Because for me, the endgame is not hoarding money, it's spending it to live the life I want. And just because one value economic rationality very much doesn't mean we all have too. Which is why there are still some very silly people donating to charities (the fools !). Kudos to politicians to sometimes have policies which make it easier to live a nice life, even if "the market" hates it. So no, the 30 year mortgage is not a "toxic product", it's a good way to allow a lot of people to go in a life path that is very appealing to a vast amount of humans.

lucas_membrane 8y ago

Isn't the focus on the 30-year fixed rate mortgage at least a little bit narrow in analyzing what happened during last decade's financial crisis? There were all kinds of negative amortization and adjustable interest loans being pushed, and I recall reading that high-leverage mortgages, not sub-prime, were where the defaults were greatest. My idea is that local governments should play a role in regulating mortgages because defaults, foreclosures, and abandoned property have serious consequences for neighborhoods and municipalities. Counties should have and exercise a right to refuse to register liens attributable to pathological lending likely to cause local economic hardship.

anonu 8y ago

The mortgage concept in the US is the ticket to the American dream. It is designed to give you essentially free money over the life of the mortgage by leveraging yourself with a loan that very few people would give you for any other investment decision. Not taking advantage of buying a house in America is a big mistake. Sure, there are plenty of pitfalls along the way, market timing can be important, location matters, etc.. but on average you are way way better off after ten years, ceteris paribus, versus someone who did not buy.

faissaloo 8y ago

The duration of the mortage is irrelevent, mortages themselves are intrinsically toxic.

sys_64738 8y ago

Renting V owning can be summarized by the following points 1) you have an asset at the end of the mortgage you can sell 2) after the mortgage is ended you have a place to live rent free in your old age Contrast to renting where you never own the place you rent and you will have to rent in your old age. Sure, you might default on the mortgage but it’s a long processed to be foreclosed. Contrast to being evicted from rent not being paid. Both have issues on default but your chances of staying put are better for mortgaged house.

nateburke 8y ago

Does anyone on this thread currently know what the current industry S.O.P. for calculating the option-adjusted spread (OAS) on agency MBS? Back when I was doing it in 2012, Monte Carlo simulation was still the gold standard, as far as I could tell.

Simulacra 8y ago

We own two rental houses and our townhouse on 30 year fixed. We are interested in building a property portfolio so for us it’s a perfect fit.