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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

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).
        jerkstate 8y ago
        Thanks, I just modified my spreadsheet predicting 4% annual return for the next 15 years (although the article I could find with Bogle's prediction is a decade of 4% returns) and then 7% thereafter. The 30Y loan still comes out ahead, but very slightly (less than $3000 advantage on about $2M expected value of the portfolio). Such is the time value of money. Agree with you about solar panels (and other efficiency upgrades) - my initial remodeling plans are improving sealing, insulation, and upgrading to a more efficient furnace. Already got the smart thermostat!
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.

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).
      - jerkstate 8y ago
        Thanks, I just modified my spreadsheet predicting 4% annual return for the next 15 years (although the article I could find with Bogle's prediction is a decade of 4% returns) and then 7% thereafter. The 30Y loan still comes out ahead, but very slightly (less than $3000 advantage on about $2M expected value of the portfolio). Such is the time value of money. Agree with you about solar panels (and other efficiency upgrades) - my initial remodeling plans are improving sealing, insulation, and upgrading to a more efficient furnace. Already got the smart thermostat!

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.