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“A $500,000 mortgage now has the same monthly payment that a $300,000 mortgage would have with 2007’s interest rates, and what a $210,000 mortgage had at mid-19

“A $500,000 mortgage now has the same monthly payment that a $300,000 mortgage would have with 2007’s interest rates, and what a $210,000 mortgage had at mid-1990s interest rates.” Isn’t this the elephant in the room? I’m assuming that the cost of housing is the single largest outgoing for most people. The low cost of debt (mortgage repayments) seems to continue to push the dollar value of homes exponentially higher so in real terms dollars are exponentially loosing value. So even if we have more savings and our investments are in good shape the actual value in real terms is actually declining rapidly.

deleted 6y ago
[deleted]
r7r7yrddy 6y ago
Wouldn't a more straightforward explanation be that increased access to capital amongst homebuyers leads to increased demand?
- inglor_cz 6y ago
  At least here in the Czech Republic the share of people owning their home vs. the share of people renting has not changed dramatically. Low interest prices are likely to spur second home buying among people who already own.
- jddjheh 6y ago
  In Poland for example prices are driven by cheaper credit (although offseted by downpaykent change from 0/10% to 20%). Most of it just young ppl moving to towns as old industries are dead/don't need ppl. The pharma company that my parents worked in almost don't have ppl in production anymore - it's all quite automated. Now good jobs are service industry, sales, marketing, software for all you need good education, so university cities are thriving. I myself moved and earn close to $60K which is good money in Poland. It's not upncommon for some parents to just buy kids apartments for $100K (in cash - for US would be $400K). Prices futher rise as owning apparment is much better than renting for anyone who can afford credit. This leds to russian oligarchs moving to property business futher increasing demand and prices. But in Poland we still have PLN not Euro so assuming growing economy properties can raise 4x (denominated in gold).
qppo 6y ago
That growth isn't exponential. Mortgage debt isn't a bad thing, the equity you build through it means you essentially come out ahead or even, once adjusting for inflation. In other words, real estate is a great way to preserve wealth.
- flower-giraffe 6y ago
  > In other words, real estate is a great way to preserve wealth. I don’t disagree, and I concede the increase in home prices is not exponential but it is certainly a long way from tracking the 2% inflation rate. The point I’m making is that the ever increasing cost of housing as a percentage of disposable income means that in real terms most people are getting poorer.
- scruple 6y ago
  > Mortgage debt isn't a bad thing Isn't this only true with the caveat that home prices remain relatively stable?
- inglor_cz 6y ago
  In the last crisis, quite a lot of people went underwater with their mortgage.
- lotsofpulp 6y ago
  > In other words, real estate is a great way to preserve wealth. Not compared to a low cost broad market index fund, for people outside of hot urban markets or popular outdoor recreational areas. There are vast swaths of land in the US that are depreciating in real terms, especially with foreseeable increases in property tax.
- imtringued 6y ago
  That's only a psychological benefit. However, it's still better if people invest into something can understand rather than something where they can be easily tricked.
- ItsMonkk 6y ago
  Cantillion Effect. The closer you are to spending new money created through lowered interest rates, the more you benefit. 2021 marks the end of the 50 year interest rate dropping cycle starting in 1971 with the end of the gold standard, now that FED rates have hit 0%. If home prices are going to continue to rise, it's going to have to do that through an increasing money supply through increased government spending alone, which is farther away so they will either benefit less or not benefit at all. If the money supply is constantly increasing like it has the past 50 years, you have an inflationary spiral where your goal is to spend as little as possible and squirrel away as much as you can in assets. On the flip side, if the money supply is constantly decreasing, you want to get out of assets as much as possible and into cash for a deflationary spiral. If interest rates begin to rise, the money supply might begin to shrink. That flips the incentives, and suddenly asset prices dive much faster than the interest rate would have you believe. You could have a $400k mortgage on a home worth $210k or less.
zpeti 6y ago
This a thousand times. This is one of the biggest issues in how we’ve set society up, yet no politician wants to bring it up because it’s harder to sell than “everyone should own a home”. Young far left wingers really should know that it’s not Jeff bezos who is taking all your money or inequality that’s the issue, it’s the low interest rates set by government, subsidized loans, and banks pushing up home prices as a result. Rising home prices are not a good thing, and are a symptom of a hugely distorted financial system. Which gets rescued whenever it fucks up. But again, it’s the government doing that, not “the rich”. With the exception of crooked bankers of course, who should rightly be in jail but aren’t.
- confounded 6y ago
  Why are the government doing it?
- jerry1979 6y ago
  Do you see the government and the rich as two distinct groups? I thought they had lots of overlap?
kccqzy 6y ago
When the government calculates inflation, they look at prices of common goods, but not housing. That's why inflation is artificially low, and even CPI-adjusted "real" monetary values don't really make sense.
- skzv 6y ago
  To be slightly more correct, they only consider interest payments in calculations of inflation, since they consider the principle a recoverable investment.
  - em500 6y ago
    Incorrect, see my sibling comment. It's strange that there are so many misconceptions around CPI, while the BLS has extensive layman-language docs about most their procedures https://www.bls.gov/opub/hom/cpi https://www.bls.gov/opub/hom/cpi
    - skzv 6y ago
      Thanks for the links. Looks like you're right, interest is not considered consumption. What is included is rent, or for owner-occupied residences, the "owners’ equivalent rent" - the figure which would be charged if the owner rented it out?
      - em500 6y ago
        Yes, OER is just asking owners "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"
- em500 6y ago
  This is incorrect. Cost of housing comprises more than 40% of the CPI basket[1], mainly through direct or owner-equivalent rent[2]. There are good practical and technical reasons why home prices are not included directly, but the costs of the main utility of a home (shelter) is one of the largest parts of the CPI calculation. [1] https://www.bls.gov/cpi/tables/relative-importance/2019.txt https://www.bls.gov/cpi/tables/relative-importance/2019.txt [2] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
julienb_sea 6y ago
> so in real terms dollars are exponentially loosing value Your premise does not justify this point. The "real value" of a home has very little to do with its building material but with the actual demand of the home, i.e. what people are willing to pay to live in this actual home in this actual location. The increasing purchasing power has increased what prices the market is willing to pay in aggregate. This is literal wealth creation for property owners or developers, and has absolutely zero devaluing impact on the dollar.
csomar 6y ago
Are you saying that lower interest rates (or any other financial shenanigans), don't magically create new homes?
speby 6y ago
Housing is probably #1 for most. Healthcare, though is arguably #2 ... https://www.kff.org/health-costs/press-release/interactive-calculator-estimates-both-direct-and-hidden-household-spending/ https://www.kff.org/health-costs/press-release/interactive-c...
- ryandrake 6y ago
  I would think taxes should be up there—ether #1 or #2, especially in high tax burden states like CA and NY. At least for middle class and above. Add federal, state, local income taxes, social security, Medicare, sales taxes, automobile taxes, property taxes up and divide by 12 and that’s probably more than either your housing cost or health care monthly cost (or both!)

deleted 6y ago

[deleted]

r7r7yrddy 6y ago

Wouldn't a more straightforward explanation be that increased access to capital amongst homebuyers leads to increased demand?

inglor_cz 6y ago
At least here in the Czech Republic the share of people owning their home vs. the share of people renting has not changed dramatically. Low interest prices are likely to spur second home buying among people who already own.
jddjheh 6y ago
In Poland for example prices are driven by cheaper credit (although offseted by downpaykent change from 0/10% to 20%). Most of it just young ppl moving to towns as old industries are dead/don't need ppl. The pharma company that my parents worked in almost don't have ppl in production anymore - it's all quite automated. Now good jobs are service industry, sales, marketing, software for all you need good education, so university cities are thriving. I myself moved and earn close to $60K which is good money in Poland. It's not upncommon for some parents to just buy kids apartments for $100K (in cash - for US would be $400K). Prices futher rise as owning apparment is much better than renting for anyone who can afford credit. This leds to russian oligarchs moving to property business futher increasing demand and prices. But in Poland we still have PLN not Euro so assuming growing economy properties can raise 4x (denominated in gold).

qppo 6y ago

That growth isn't exponential. Mortgage debt isn't a bad thing, the equity you build through it means you essentially come out ahead or even, once adjusting for inflation. In other words, real estate is a great way to preserve wealth.

flower-giraffe 6y ago
> In other words, real estate is a great way to preserve wealth. I don’t disagree, and I concede the increase in home prices is not exponential but it is certainly a long way from tracking the 2% inflation rate. The point I’m making is that the ever increasing cost of housing as a percentage of disposable income means that in real terms most people are getting poorer.
scruple 6y ago
> Mortgage debt isn't a bad thing Isn't this only true with the caveat that home prices remain relatively stable?
inglor_cz 6y ago
In the last crisis, quite a lot of people went underwater with their mortgage.
lotsofpulp 6y ago
> In other words, real estate is a great way to preserve wealth. Not compared to a low cost broad market index fund, for people outside of hot urban markets or popular outdoor recreational areas. There are vast swaths of land in the US that are depreciating in real terms, especially with foreseeable increases in property tax.
imtringued 6y ago
That's only a psychological benefit. However, it's still better if people invest into something can understand rather than something where they can be easily tricked.
ItsMonkk 6y ago
Cantillion Effect. The closer you are to spending new money created through lowered interest rates, the more you benefit. 2021 marks the end of the 50 year interest rate dropping cycle starting in 1971 with the end of the gold standard, now that FED rates have hit 0%. If home prices are going to continue to rise, it's going to have to do that through an increasing money supply through increased government spending alone, which is farther away so they will either benefit less or not benefit at all. If the money supply is constantly increasing like it has the past 50 years, you have an inflationary spiral where your goal is to spend as little as possible and squirrel away as much as you can in assets. On the flip side, if the money supply is constantly decreasing, you want to get out of assets as much as possible and into cash for a deflationary spiral. If interest rates begin to rise, the money supply might begin to shrink. That flips the incentives, and suddenly asset prices dive much faster than the interest rate would have you believe. You could have a $400k mortgage on a home worth $210k or less.

zpeti 6y ago

This a thousand times. This is one of the biggest issues in how we’ve set society up, yet no politician wants to bring it up because it’s harder to sell than “everyone should own a home”. Young far left wingers really should know that it’s not Jeff bezos who is taking all your money or inequality that’s the issue, it’s the low interest rates set by government, subsidized loans, and banks pushing up home prices as a result. Rising home prices are not a good thing, and are a symptom of a hugely distorted financial system. Which gets rescued whenever it fucks up. But again, it’s the government doing that, not “the rich”. With the exception of crooked bankers of course, who should rightly be in jail but aren’t.

confounded 6y ago
Why are the government doing it?
jerry1979 6y ago
Do you see the government and the rich as two distinct groups? I thought they had lots of overlap?

kccqzy 6y ago

When the government calculates inflation, they look at prices of common goods, but not housing. That's why inflation is artificially low, and even CPI-adjusted "real" monetary values don't really make sense.

skzv 6y ago
To be slightly more correct, they only consider interest payments in calculations of inflation, since they consider the principle a recoverable investment.
- em500 6y ago
  Incorrect, see my sibling comment. It's strange that there are so many misconceptions around CPI, while the BLS has extensive layman-language docs about most their procedures https://www.bls.gov/opub/hom/cpi https://www.bls.gov/opub/hom/cpi
  - skzv 6y ago
    Thanks for the links. Looks like you're right, interest is not considered consumption. What is included is rent, or for owner-occupied residences, the "owners’ equivalent rent" - the figure which would be charged if the owner rented it out?
    - em500 6y ago
      Yes, OER is just asking owners "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"
em500 6y ago
This is incorrect. Cost of housing comprises more than 40% of the CPI basket[1], mainly through direct or owner-equivalent rent[2]. There are good practical and technical reasons why home prices are not included directly, but the costs of the main utility of a home (shelter) is one of the largest parts of the CPI calculation. [1] https://www.bls.gov/cpi/tables/relative-importance/2019.txt https://www.bls.gov/cpi/tables/relative-importance/2019.txt [2] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...

julienb_sea 6y ago

> so in real terms dollars are exponentially loosing value Your premise does not justify this point. The "real value" of a home has very little to do with its building material but with the actual demand of the home, i.e. what people are willing to pay to live in this actual home in this actual location. The increasing purchasing power has increased what prices the market is willing to pay in aggregate. This is literal wealth creation for property owners or developers, and has absolutely zero devaluing impact on the dollar.

csomar 6y ago

Are you saying that lower interest rates (or any other financial shenanigans), don't magically create new homes?

speby 6y ago

Housing is probably #1 for most. Healthcare, though is arguably #2 ... https://www.kff.org/health-costs/press-release/interactive-calculator-estimates-both-direct-and-hidden-household-spending/ https://www.kff.org/health-costs/press-release/interactive-c...

ryandrake 6y ago
I would think taxes should be up there—ether #1 or #2, especially in high tax burden states like CA and NY. At least for middle class and above. Add federal, state, local income taxes, social security, Medicare, sales taxes, automobile taxes, property taxes up and divide by 12 and that’s probably more than either your housing cost or health care monthly cost (or both!)