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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

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?
      - toomuchtodo 8y ago
        Probably a bit strong of a word, but speaking broadly it’s rare when real estate retreats in value. I say this as someone who walked away from an underwater property after the 2008 GFC. Yes, property sometimes loses value in black swan events or in specific regions, but on average at the macro level it keeps up with inflation.
        taf2 8y ago
        Population is growing and the earth is still the same size. The number places you can build a new home is shrinking and more people want a home - so prices will tend to go up. So it’s usually a safe bet to say home prices will only go up.
        closeparen 8y ago
        Until buyers have no other spending or saving left to cut.
        iambateman 8y ago
        Multiply this principle by the “attraction to city amenities” and the “acceptable travel time”. The number of places to build a new home proximate to food and leisure is limited and creates this effect near cities. Drive into the country, and there are plenty of remaining 0.1 acre plots available for cheap. If self-driving cars substantially affect the cost of transportation time, we could see another epic flight further and further from cities, which would hold housing prices down for a long time.
        wolco 8y ago
        In places with a raising population ideally with raising wealth
    - rictic 8y ago
      AIUI, investing in the stock market has a higher expected return with similar risk over a 30 year period. Owning a home is putting a large portion of your net worth into a single asset. From an investment perspective, that goes against the central principle of portfolio management: diversified risk.
      - toomuchtodo 8y ago
        Everyone needs a place to live, and most people aren’t going to move frequently enough where renting would be a superior option (excluding specific outlier markets like SF and parts of NYC). The mortgage interest deduction isn’t terribly generous, but property taxes usually provide for an exemption if you’re an owner versus renting. We subsidize home ownership heavily in the US. I’m not arguing you should treat your home as an investment primarily, but if you own or plan to, recognize it for what it is, another asset in your portfolio. Also, I have a comment in this thread where I point out that future market returns are expected to be on par with your mortgage rate; paying your mortgage down would be a better return than investing if those predictions hold true.
  - JumpCrisscross 8y ago
    > Why do you say homeowning was the path to wealth? Americans are terrible savers. Mortgages force people to save. And while houses aren’t a great savings vehicle, they do—on average, in industrialised societies—appreciate alongside inflation [1]. Buying a house won’t make one wealthy. But it will force good habits that tend to make one wealthier. [1] https://www.amazon.com/Safe-Houses-Historical-Analysis-Property/dp/1907994017 https://www.amazon.com/Safe-Houses-Historical-Analysis-Prope...
- njarboe 8y ago
  This was before the home equity loan and rocket mortgage refi's. Now days, if you don't have spending discipline, owning a house does not make saving easier or a path to wealth. You can set up a line of credit against your home equity and spend it as easy as writing a check or doing a bank transfer. Many companies are advertising to you that this is a great idea. Most of the people I know in the Bay Area who have bought homes in the last 20 years have spent most of the huge amount of appreciation that has happened to their homes.
graeme 8y ago
Mortgages are fairly new though. In America they started in the 1930s and were short term. Unsure when they became longer term committments, but probably not before the 50s or 60s. I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower.
- sjg007 8y ago
  Yep.. offer financing is an easy way to raise the base price of a good. Homes usually though make sense financially. You get something you own in 30 years so you can live in it on retirement income.. or sell it at an appreciated value (so your net housing costs are at least $0 if you are unlucky to not make any money and not have lost value.. And in some cases you can rent it out to generate income. Combine that with a low rate and it seems like a good idea. Higher rates cause lower house prices though so that's not good except we have the problem now of not enough housing so that may mitigate things.
- dragonwriter 8y ago
  > Mortgages are fairly new though. Mortgages are quite old. > In America they started in the 1930s and were short term. No, they are much older. There was a mortgage crisis in the 1930s, but they weren't introduced then. > Unsure when they became longer term committments Well, the modern term of 15+ years was a result of mortgage insurance policy of the FHA, established in the 1930s in response to the crisis. > I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower. The last part is true, because they would be harder to afford despite lower cash prices.
  - graeme 8y ago
    I originally used Howstuffworks, it was a bit vague. The wikipedia summary was better. So: * mortgages before the 1934 reforms weren't quite what we'd recognize as mortgages. They generally didn't cover the full value of the house. And their widespread use seemed fairly new in the 1920s and lead to a crash * the 1934 act created 15 year mortgages (I was wrong to say 5, that must have been the refinancing timeframe) * the 30 year mortgage was indeed only introduced in the 1950s. So it's a rather recent tradition https://en.m.wikipedia.org/wiki/National_Mortgage_Crisis_of_the_1930s https://en.m.wikipedia.org/wiki/National_Mortgage_Crisis_of_...
crazygringo 8y ago
But many people automatically assume home ownership is a good thing... and the government officially promotes it as well (see mortgage interest deduction). You're right this is why mortgages exist, but you're not explaining the demand. It's also easy to imagine an alternate universe where most homes are owned by institutional landlords, people rent, and invest what their interest payments would have gone to in index funds instead, winding up with a more reliable chunk of cash when they retire instead of a home whose value is hard to predict.
- jimmy1 8y ago
  Ownership beats the hell out of renting. The key is owning something you can afford. The problem is people buy homes automatically thinking they will rise in value and they will make money off of it. Buy a home to live in.
  - njarboe 8y ago
    Without 30 year loans and low down-payments, areas where the rent is much lower than the cost of owning a house (like the Bay Area) would have much lower housing prices. Many fewer individuals would be buying and the investment firms would not be pumping up prices on a bad investment.
  - nobodyandproud 8y ago
    You see this anywhere. Take NYC's outer boroughs. Same block. Buildings built at the same time. The owner-heavy condos are in far better shape than the ones that are mostly rented. There is a huge social benefit to ownership.
    - crazygringo 8y ago
      I live in Bed-Stuy. I just don't see this pattern at all. You can own your own home and not invest in maintenance too because you don't have the money, while landlords need to attract renters. I don't see any compelling evidence there's a trend toward live-in owners maintaining higher quality.
  - 8y ago
rictic 8y ago
> But the measured reality is that home ownership is strongly correlated with wealth Owning a private jet is far more strongly correlated with wealth, but that doesn't mean it's a good investment.
- snowwrestler 8y ago
  Owning a home is correlated with developing wealth. The average person who owns their home will develop higher levels of wealth during their lifetime than the average person who does not. This holds true even for people who start out with very little wealth and use a mortgage to purchase their home.
- wolco 8y ago
  It might be if you are renting a private jet monthly for slightly less you could purchase. And for some reason older jets are worth more because they are parked in mature airports.
- slededit 8y ago
  Everyone is born short housing - you need a place to live. We’re neutral on private jets though. You can get along without them. It’s generally advisable to cover your short positions.
TheCoelacanth 8y ago
They explicitly said that they don't think getting a 30 year mortgage is a bad decision for an individual. They are complaining about 30 year mortgages from a policy perspective. > 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. The policy wouldn’t be bad if it weren’t effective, and it’s only effective to the extent that it encourages people to actually get the loans. So while I think there are prudent asset allocation reasons to favor renting over buying, if you don’t buy into those a standard mortgage is a relatively tax-efficient way to pay for housing.
woolvalley 8y ago
Spain and Greece have higher home ownership rates than the USA, Germany and Switzerland, but far worse economies. Home ownership being correlated with wealth is the correlation of being able to consume more resources and what the policy environment incentivizes, not that one nation is wealthier than another. https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/ https://qz.com/167887/germany-has-one-of-the-worlds-lowest-h... I mostly bought my house for the tax deductions and a form of rent control, not as a wealth building tool. Without the deductions, putting my money into ETFs was more lucrative.
jgalt212 8y ago
> The thirty-year fixed-rate prepayment-option mortgage is an economic disaster. It encourages mass malinvestment. Policies designed to help low-income people build wealth actually trap them at the worst possible time. It presents macroeconomic risks (as we learned in 2008) Well not too smart, a very low % of the defaults in 2008 could be attributed to prepayable 30Y level pay mortgages.

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?
    - toomuchtodo 8y ago
      Probably a bit strong of a word, but speaking broadly it’s rare when real estate retreats in value. I say this as someone who walked away from an underwater property after the 2008 GFC. Yes, property sometimes loses value in black swan events or in specific regions, but on average at the macro level it keeps up with inflation.
      - taf2 8y ago
        Population is growing and the earth is still the same size. The number places you can build a new home is shrinking and more people want a home - so prices will tend to go up. So it’s usually a safe bet to say home prices will only go up.
        closeparen 8y ago
        Until buyers have no other spending or saving left to cut.
        iambateman 8y ago
        Multiply this principle by the “attraction to city amenities” and the “acceptable travel time”. The number of places to build a new home proximate to food and leisure is limited and creates this effect near cities. Drive into the country, and there are plenty of remaining 0.1 acre plots available for cheap. If self-driving cars substantially affect the cost of transportation time, we could see another epic flight further and further from cities, which would hold housing prices down for a long time.
      - wolco 8y ago
        In places with a raising population ideally with raising wealth
  - rictic 8y ago
    AIUI, investing in the stock market has a higher expected return with similar risk over a 30 year period. Owning a home is putting a large portion of your net worth into a single asset. From an investment perspective, that goes against the central principle of portfolio management: diversified risk.
    - toomuchtodo 8y ago
      Everyone needs a place to live, and most people aren’t going to move frequently enough where renting would be a superior option (excluding specific outlier markets like SF and parts of NYC). The mortgage interest deduction isn’t terribly generous, but property taxes usually provide for an exemption if you’re an owner versus renting. We subsidize home ownership heavily in the US. I’m not arguing you should treat your home as an investment primarily, but if you own or plan to, recognize it for what it is, another asset in your portfolio. Also, I have a comment in this thread where I point out that future market returns are expected to be on par with your mortgage rate; paying your mortgage down would be a better return than investing if those predictions hold true.
- JumpCrisscross 8y ago
  > Why do you say homeowning was the path to wealth? Americans are terrible savers. Mortgages force people to save. And while houses aren’t a great savings vehicle, they do—on average, in industrialised societies—appreciate alongside inflation [1]. Buying a house won’t make one wealthy. But it will force good habits that tend to make one wealthier. [1] https://www.amazon.com/Safe-Houses-Historical-Analysis-Property/dp/1907994017 https://www.amazon.com/Safe-Houses-Historical-Analysis-Prope...
njarboe 8y ago
This was before the home equity loan and rocket mortgage refi's. Now days, if you don't have spending discipline, owning a house does not make saving easier or a path to wealth. You can set up a line of credit against your home equity and spend it as easy as writing a check or doing a bank transfer. Many companies are advertising to you that this is a great idea. Most of the people I know in the Bay Area who have bought homes in the last 20 years have spent most of the huge amount of appreciation that has happened to their homes.

graeme 8y ago

Mortgages are fairly new though. In America they started in the 1930s and were short term. Unsure when they became longer term committments, but probably not before the 50s or 60s. I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower.

sjg007 8y ago
Yep.. offer financing is an easy way to raise the base price of a good. Homes usually though make sense financially. You get something you own in 30 years so you can live in it on retirement income.. or sell it at an appreciated value (so your net housing costs are at least $0 if you are unlucky to not make any money and not have lost value.. And in some cases you can rent it out to generate income. Combine that with a low rate and it seems like a good idea. Higher rates cause lower house prices though so that's not good except we have the problem now of not enough housing so that may mitigate things.
dragonwriter 8y ago
> Mortgages are fairly new though. Mortgages are quite old. > In America they started in the 1930s and were short term. No, they are much older. There was a mortgage crisis in the 1930s, but they weren't introduced then. > Unsure when they became longer term committments Well, the modern term of 15+ years was a result of mortgage insurance policy of the FHA, established in the 1930s in response to the crisis. > I suspect mortgages inflated home values, and that homes would be easier to afford without them. But home ownership rates would also be lower. The last part is true, because they would be harder to afford despite lower cash prices.
- graeme 8y ago
  I originally used Howstuffworks, it was a bit vague. The wikipedia summary was better. So: * mortgages before the 1934 reforms weren't quite what we'd recognize as mortgages. They generally didn't cover the full value of the house. And their widespread use seemed fairly new in the 1920s and lead to a crash * the 1934 act created 15 year mortgages (I was wrong to say 5, that must have been the refinancing timeframe) * the 30 year mortgage was indeed only introduced in the 1950s. So it's a rather recent tradition https://en.m.wikipedia.org/wiki/National_Mortgage_Crisis_of_the_1930s https://en.m.wikipedia.org/wiki/National_Mortgage_Crisis_of_...

crazygringo 8y ago

But many people automatically assume home ownership is a good thing... and the government officially promotes it as well (see mortgage interest deduction). You're right this is why mortgages exist, but you're not explaining the demand. It's also easy to imagine an alternate universe where most homes are owned by institutional landlords, people rent, and invest what their interest payments would have gone to in index funds instead, winding up with a more reliable chunk of cash when they retire instead of a home whose value is hard to predict.

jimmy1 8y ago
Ownership beats the hell out of renting. The key is owning something you can afford. The problem is people buy homes automatically thinking they will rise in value and they will make money off of it. Buy a home to live in.
- njarboe 8y ago
  Without 30 year loans and low down-payments, areas where the rent is much lower than the cost of owning a house (like the Bay Area) would have much lower housing prices. Many fewer individuals would be buying and the investment firms would not be pumping up prices on a bad investment.
- nobodyandproud 8y ago
  You see this anywhere. Take NYC's outer boroughs. Same block. Buildings built at the same time. The owner-heavy condos are in far better shape than the ones that are mostly rented. There is a huge social benefit to ownership.
  - crazygringo 8y ago
    I live in Bed-Stuy. I just don't see this pattern at all. You can own your own home and not invest in maintenance too because you don't have the money, while landlords need to attract renters. I don't see any compelling evidence there's a trend toward live-in owners maintaining higher quality.
- 8y ago

rictic 8y ago

> But the measured reality is that home ownership is strongly correlated with wealth Owning a private jet is far more strongly correlated with wealth, but that doesn't mean it's a good investment.

snowwrestler 8y ago
Owning a home is correlated with developing wealth. The average person who owns their home will develop higher levels of wealth during their lifetime than the average person who does not. This holds true even for people who start out with very little wealth and use a mortgage to purchase their home.
wolco 8y ago
It might be if you are renting a private jet monthly for slightly less you could purchase. And for some reason older jets are worth more because they are parked in mature airports.
slededit 8y ago
Everyone is born short housing - you need a place to live. We’re neutral on private jets though. You can get along without them. It’s generally advisable to cover your short positions.

TheCoelacanth 8y ago

They explicitly said that they don't think getting a 30 year mortgage is a bad decision for an individual. They are complaining about 30 year mortgages from a policy perspective. > 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. The policy wouldn’t be bad if it weren’t effective, and it’s only effective to the extent that it encourages people to actually get the loans. So while I think there are prudent asset allocation reasons to favor renting over buying, if you don’t buy into those a standard mortgage is a relatively tax-efficient way to pay for housing.

woolvalley 8y ago

Spain and Greece have higher home ownership rates than the USA, Germany and Switzerland, but far worse economies. Home ownership being correlated with wealth is the correlation of being able to consume more resources and what the policy environment incentivizes, not that one nation is wealthier than another. https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/ https://qz.com/167887/germany-has-one-of-the-worlds-lowest-h... I mostly bought my house for the tax deductions and a form of rent control, not as a wealth building tool. Without the deductions, putting my money into ETFs was more lucrative.

jgalt212 8y ago

> The thirty-year fixed-rate prepayment-option mortgage is an economic disaster. It encourages mass malinvestment. Policies designed to help low-income people build wealth actually trap them at the worst possible time. It presents macroeconomic risks (as we learned in 2008) Well not too smart, a very low % of the defaults in 2008 could be attributed to prepayable 30Y level pay mortgages.