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Whether they mean it or not, it's sensible. Mortgage amounts correlate to home prices. Consider the most basic idea that if mortgages did not exist, there would

Whether they mean it or not, it's sensible. Mortgage amounts correlate to home prices. Consider the most basic idea that if mortgages did not exist, there would be far fewer people who could pay a premium price for a house, and thus the housing market would be forced to cater to the much lower prices and less expensive housing that people could afford without mortgages. I mean, except there's some point where the reality is just untenable, people need to be able to borrow. But the easier it is to borrow, the easier it is for more people to buy more expensive houses and bid up the prices.

xeromal 5y ago
ala 2008 jumbo loans
majormajor 5y ago
Even more direct is the link between interest rates and house prices. Lower rates push up prices for everyone, you don't get the choice of borrowing X at a better rate to save money every month instead of borrowing X+Y with the same payment if someone else is out there willing to pay X+Y. It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.
- mumblemumble 5y ago
  I'm not even sure it's reckless. Especially with rates so low, even a fairly small absolute change in interest rates can have a huge impact on the actual price you theoretically pay for the house, which includes both principal and interest. Paying way too much at 2.75% may actually be less expensive than paying a more reasonable price at 3.25%. Meaning that, if you've got any concerns that rates might go up in the near future, you're reasonably well incentivized to get into a bidding war in order to close now instead of later.
weatherlight 5y ago
college tuitions, mortgages, etc.
- runawaybottle 5y ago
  Right, financing is the word we’re looking for. We give people credit cards, college loans, car loans, home loans, your phone is a loan, etc. Everything is financed so people don’t really save up to outright purchase something. It brings us to a fundamental question, and that is, how many years should it really take for someone to buy anything with straight cash. For homes the market believes 15-30 years. For college, it believes something like 2 years to the day you die lol. Dare I say the people that actually own this stuff before everyone else may believe you should never be able to afford it. That you will buy any number of these things and keep paying until the day you die. Life-as-a-service. If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing.
  - ajsnigrutin 5y ago
    > If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing. This is true, when other regulations prevent people from creating more of the goods. Yes, a seller can sell a box of pasta for $100k... but who will buy it, if you can make your own pasta for cheap, and even sell it to people who want to buy it, but don't want to pay the first sellers house. In my city, the housing prices are fscking high and rising, but we have literal cornfields and cows in places that are technically the middle of the city. We have right governments, who don't do anything about housing, we have left governments, saying they'll rais the rent taxes (so making rents higher) and build government apartment buildings (=too expensive) for people (=their friends), but noone stops to look at the satellite map and say "hmm.. we could build here, and there, and there...". Look at San francico for example... there is a huge need for housing, but most of the houses are single family houses... there's no way to pack so many people there in such houses - you need to build huge apartments buildings, but regulation does not allow that, and housing is expensive.
yunohn 5y ago
> Mortgage amounts correlate to home prices. This is completely true. Another example, in NL, the gov removed “transfer tax” on first-home purchases in 2021. This led to an increase in housing prices, as the “savings” just helped people bid higher on houses. The world and its economy are absurd.
- sudosysgen 5y ago
  Housing markets just really suck. They tend to settle just so as to be too expensive for many and extract tons of value from the poor.
  - freeone3000 5y ago
    That's how markets work, no? The goal of pricing a scarce good is to put it at what people are willing to pay, which for something you need to live, is all they are able to pay. The system is working as designed.
    - treis 5y ago
      The market working would be supply matching the demand to keep prices relatively steady. But supply is artificially restricted leading to stupid price increases.
      - sudosysgen 5y ago
        The GP alluded to housing being a scarce good. Yes, you can increase housing density, but you eventually hit a wall where infrastructure is limiting and expensive to build meaning that you can't drop the price of housing. At which point the only solution is to build more cities or enter a death spiral. It's why China had to start building cities, eventually density stops being economically feasible either.
        treis 5y ago
        Sure, but the wall is not a million bucks for a 3/2 home.
amalcon 5y ago
Hmm, this would be pretty easy to test I'd think. You should see a definite knee in US property prices around $612k ($510k conforming loan maximum + 20% standard down payment). Above that price, loans will be harder to obtain and command higher interest rates. Does anyone have a good source of this kind of data?
- majormajor 5y ago
  The conforming loan max is different in different areas, so you'd have to look at this very regionally. 20% is hardly universal too. When I looked, non-conforming loans had slightly higher rates, but in a sub-3% world... it wasn't a huge difference. Sometimes down payment affected the rate, sometimes it didn't. Lenders seemed to have a lot of knobs to tweak on the backend to make it work if they wanted to make the loan for clients who were shopping around.
b9a2cab5 5y ago
Except housing prices aren't what matter, monthly payments are. If interest rates are lower but payments are the same, the only people that benefit are existing homeowners, but new home buyers aren't harmed since monthly payments stay the same. The banks and MBS investors are the ones who get screwed since they make super low rates. In some ways lower interest rates is actually better since higher home values mean you can spend more on amenities like high end kitchen and bathroom as a builder. The issue comes when you start looking at sub-prime debtors like students. If you have a 300 bps risk premium for being an unreliable borrower but the interest rate for reliable creditors is only 2%, your risk premium is 150%, but if the reliable borrower rate was 6% then your risk premium is only 50%. Add to this the fact that refinancing student loans (issued by the government) causes them to lose benefits like the 0% interest pause we have right now. That means the government intervention has caused a market distortion: you can't fungibly exchange your loan for a refinanced one at the market rate but instead are stuck with the 5-8% rates from 5 years ago. Government intervention also has other impacts: since you can't discharge student loans in bankruptcy, there's no incentive for universities to make students succeed or to discriminate admittance/cost by major (proxy for future earning power). That means we have a huge number of people stuck with high interest loans they can't discharge or refinance and useless degrees in majors that have 0 value to society. If you changed this to allow students to discharge student debt in bankruptcy and forced universities to assume the risk instead of the government, university incentives would be aligned with student incentives.
- Red_Leaves_Flyy 5y ago
  I can’t think of a single degree that has zero value to society. At scale, I can think of several that have negative value. But generally? No, every degree has value. Some are abstract and hard to quantify in ways that economists can track but that doesn’t mean the world wouldn’t be worse without them.
  - b9a2cab5 5y ago
    Zero value, negative value, for the purposes of determining whether we should be subsidizing college these are the same. I think it's very unlikely most humanities majors are going on to produce culture defining works. Perhaps in the Ivy Leagues, but that's also where students are primarily wealthy and already capable of paying for college and therefore not subsidized by the state. I went to a highly ranked public school and most humanities majors ended up working either in low paying clerical work (data entry, event planning, on-site property management, etc.) or in food service (i.e. barista). These are jobs where you don't need a college education (or maybe just an associate's degree) and certainly not a four year degree in classics. IIRC most European countries don't have anywhere near the size of humanities programs that the US does, most students that can't make it into a good humanities program or can't make it into STEM go to trade schools. Europe doesn't have quite the number of private schools offering these useless degrees to people who couldn't get accepted into more prestigious institutions.
iso1631 5y ago
Well no, people with capital would be able to buy the houses and then rent it out, extracting the maximum amount they can. As wages go up, the money available for people to pay for housing goes up. If a given city employs people and pays enough that 1 person earning an typical wage can afford $1k a month rent, then that's what rent will be. It won't be lower (because landlords will charge the most they can), but it won't be higher (people will move to another city - perhaps one with lower wages, but lower rent). When we switched to a society where it was normal to have 2 incomes in a given house, the money available to pay for housing increased dramatically (towards $2k, but for families you'd have to remove things like childcare costs which would normally have been done by 1 person), and thus rents increase to the point where supply/demand returns to an equilibrium. Now aside from rent, you could also buy. A house costs whatever the maintenence is, plus the interest cost of the mortgage (there's also the capital repayment part and the likelihood of the house increasing in value in the future) Rents are also capped by this - if the cost of buying (including the maintenence) goes below renting, then people will buy. That means house prices are constrained by rental - if the cost of buying/owning house is too much, people will rent. Ultimately they to can always move out of the city and leave their job. When interest rates went down, people could spent more on buying a house, which meant prices went up. Imagine a couple that have a budget for $2k a month for housing. If interest rates were to double, mortgage costs would increase. That wouldn't change rents (which would still be $2k), but instead of a house costing say $800k (2k/month allowing 800k loan at 3% interest), instead people could only borrow say 400k. That means that houses go down to 400k, but still cost the same per month. This is great for people with spare cash, as they can buy up those cheaper properties without having to pay the interest, and still get their $2k/month rent coming in. It's no change for people who want to buy for $2k/month, that's what they can afford, and it's going to be roughly the same as what it would cost to rent. It's terrible for people who want to sell and repay their equity, as the house price has suddenly halved. They bought it with an 800k loan, have repaid 10% of that, and owe 720k, now they can only sell for 400k. So they rent it out instead and rent somewhere else.
sologoub 5y ago
It cuts both ways - if it wasn’t for FHA and very easy borrowing for first time home buyers, many many more people would still be renting and likely not building at least some wealth/equity. By constraining the supply of loans, first and foremost you’d be cutting out those who need it most. Unfortunately, that’s how risk markets work - the riskiest (also usually the poorest) get cut first. The interest rate argument isn’t actually very grounded in fact - in order to save from refinancing, the rates have to have declined from where they were before. If rates stay flat, there is no benefits in refi - whether they stay flat at 5%, 3% or 10%, as long as the rates stay flat. However, borrowing at a lower rate is better because you end up putting more into the equity. If you borrow at zero percent, everything you pay in goes to reduce the principle and so long as the property doesn’t decline, you are building wealth. This is why arguing to reduce the loan supply to me is very counterproductive. What we need is better education and fewer predatory lending practices. Things like payday loans, etc, are currently predatory. Those could be reformed to serve the purpose they were originally intended for (emergency money), but until that happens, things like that create the actual problem, not the loan supply itself.
- analyst74 5y ago
  > many many more people would still be renting and likely not building at least some wealth/equity. This seems true intuitively, but if you think deeper, where does that accumulated wealth/equity come from? They are paid by future generations of regular people, or generational wealth transfer as some call it.
  - sologoub 5y ago
    And if you pay rent, where does that go? Especially when renting from a large company? Better more folks accumulate at least something.
gnopgnip 5y ago
The market is not a zero sum game. If mortgages were illegal, the same houses would just be more expensive overall, and effectively most would be living in smaller or worse homes as a result.

xeromal 5y ago

ala 2008 jumbo loans

majormajor 5y ago

Even more direct is the link between interest rates and house prices. Lower rates push up prices for everyone, you don't get the choice of borrowing X at a better rate to save money every month instead of borrowing X+Y with the same payment if someone else is out there willing to pay X+Y. It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.

mumblemumble 5y ago
I'm not even sure it's reckless. Especially with rates so low, even a fairly small absolute change in interest rates can have a huge impact on the actual price you theoretically pay for the house, which includes both principal and interest. Paying way too much at 2.75% may actually be less expensive than paying a more reasonable price at 3.25%. Meaning that, if you've got any concerns that rates might go up in the near future, you're reasonably well incentivized to get into a bidding war in order to close now instead of later.

weatherlight 5y ago

college tuitions, mortgages, etc.

runawaybottle 5y ago
Right, financing is the word we’re looking for. We give people credit cards, college loans, car loans, home loans, your phone is a loan, etc. Everything is financed so people don’t really save up to outright purchase something. It brings us to a fundamental question, and that is, how many years should it really take for someone to buy anything with straight cash. For homes the market believes 15-30 years. For college, it believes something like 2 years to the day you die lol. Dare I say the people that actually own this stuff before everyone else may believe you should never be able to afford it. That you will buy any number of these things and keep paying until the day you die. Life-as-a-service. If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing.
- ajsnigrutin 5y ago
  > If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing. This is true, when other regulations prevent people from creating more of the goods. Yes, a seller can sell a box of pasta for $100k... but who will buy it, if you can make your own pasta for cheap, and even sell it to people who want to buy it, but don't want to pay the first sellers house. In my city, the housing prices are fscking high and rising, but we have literal cornfields and cows in places that are technically the middle of the city. We have right governments, who don't do anything about housing, we have left governments, saying they'll rais the rent taxes (so making rents higher) and build government apartment buildings (=too expensive) for people (=their friends), but noone stops to look at the satellite map and say "hmm.. we could build here, and there, and there...". Look at San francico for example... there is a huge need for housing, but most of the houses are single family houses... there's no way to pack so many people there in such houses - you need to build huge apartments buildings, but regulation does not allow that, and housing is expensive.

yunohn 5y ago

> Mortgage amounts correlate to home prices. This is completely true. Another example, in NL, the gov removed “transfer tax” on first-home purchases in 2021. This led to an increase in housing prices, as the “savings” just helped people bid higher on houses. The world and its economy are absurd.

sudosysgen 5y ago
Housing markets just really suck. They tend to settle just so as to be too expensive for many and extract tons of value from the poor.
- freeone3000 5y ago
  That's how markets work, no? The goal of pricing a scarce good is to put it at what people are willing to pay, which for something you need to live, is all they are able to pay. The system is working as designed.
  - treis 5y ago
    The market working would be supply matching the demand to keep prices relatively steady. But supply is artificially restricted leading to stupid price increases.
    - sudosysgen 5y ago
      The GP alluded to housing being a scarce good. Yes, you can increase housing density, but you eventually hit a wall where infrastructure is limiting and expensive to build meaning that you can't drop the price of housing. At which point the only solution is to build more cities or enter a death spiral. It's why China had to start building cities, eventually density stops being economically feasible either.
      - treis 5y ago
        Sure, but the wall is not a million bucks for a 3/2 home.

amalcon 5y ago

Hmm, this would be pretty easy to test I'd think. You should see a definite knee in US property prices around $612k ($510k conforming loan maximum + 20% standard down payment). Above that price, loans will be harder to obtain and command higher interest rates. Does anyone have a good source of this kind of data?

majormajor 5y ago
The conforming loan max is different in different areas, so you'd have to look at this very regionally. 20% is hardly universal too. When I looked, non-conforming loans had slightly higher rates, but in a sub-3% world... it wasn't a huge difference. Sometimes down payment affected the rate, sometimes it didn't. Lenders seemed to have a lot of knobs to tweak on the backend to make it work if they wanted to make the loan for clients who were shopping around.

b9a2cab5 5y ago

Except housing prices aren't what matter, monthly payments are. If interest rates are lower but payments are the same, the only people that benefit are existing homeowners, but new home buyers aren't harmed since monthly payments stay the same. The banks and MBS investors are the ones who get screwed since they make super low rates. In some ways lower interest rates is actually better since higher home values mean you can spend more on amenities like high end kitchen and bathroom as a builder. The issue comes when you start looking at sub-prime debtors like students. If you have a 300 bps risk premium for being an unreliable borrower but the interest rate for reliable creditors is only 2%, your risk premium is 150%, but if the reliable borrower rate was 6% then your risk premium is only 50%. Add to this the fact that refinancing student loans (issued by the government) causes them to lose benefits like the 0% interest pause we have right now. That means the government intervention has caused a market distortion: you can't fungibly exchange your loan for a refinanced one at the market rate but instead are stuck with the 5-8% rates from 5 years ago. Government intervention also has other impacts: since you can't discharge student loans in bankruptcy, there's no incentive for universities to make students succeed or to discriminate admittance/cost by major (proxy for future earning power). That means we have a huge number of people stuck with high interest loans they can't discharge or refinance and useless degrees in majors that have 0 value to society. If you changed this to allow students to discharge student debt in bankruptcy and forced universities to assume the risk instead of the government, university incentives would be aligned with student incentives.

Red_Leaves_Flyy 5y ago
I can’t think of a single degree that has zero value to society. At scale, I can think of several that have negative value. But generally? No, every degree has value. Some are abstract and hard to quantify in ways that economists can track but that doesn’t mean the world wouldn’t be worse without them.
- b9a2cab5 5y ago
  Zero value, negative value, for the purposes of determining whether we should be subsidizing college these are the same. I think it's very unlikely most humanities majors are going on to produce culture defining works. Perhaps in the Ivy Leagues, but that's also where students are primarily wealthy and already capable of paying for college and therefore not subsidized by the state. I went to a highly ranked public school and most humanities majors ended up working either in low paying clerical work (data entry, event planning, on-site property management, etc.) or in food service (i.e. barista). These are jobs where you don't need a college education (or maybe just an associate's degree) and certainly not a four year degree in classics. IIRC most European countries don't have anywhere near the size of humanities programs that the US does, most students that can't make it into a good humanities program or can't make it into STEM go to trade schools. Europe doesn't have quite the number of private schools offering these useless degrees to people who couldn't get accepted into more prestigious institutions.

iso1631 5y ago

Well no, people with capital would be able to buy the houses and then rent it out, extracting the maximum amount they can. As wages go up, the money available for people to pay for housing goes up. If a given city employs people and pays enough that 1 person earning an typical wage can afford $1k a month rent, then that's what rent will be. It won't be lower (because landlords will charge the most they can), but it won't be higher (people will move to another city - perhaps one with lower wages, but lower rent). When we switched to a society where it was normal to have 2 incomes in a given house, the money available to pay for housing increased dramatically (towards $2k, but for families you'd have to remove things like childcare costs which would normally have been done by 1 person), and thus rents increase to the point where supply/demand returns to an equilibrium. Now aside from rent, you could also buy. A house costs whatever the maintenence is, plus the interest cost of the mortgage (there's also the capital repayment part and the likelihood of the house increasing in value in the future) Rents are also capped by this - if the cost of buying (including the maintenence) goes below renting, then people will buy. That means house prices are constrained by rental - if the cost of buying/owning house is too much, people will rent. Ultimately they to can always move out of the city and leave their job. When interest rates went down, people could spent more on buying a house, which meant prices went up. Imagine a couple that have a budget for $2k a month for housing. If interest rates were to double, mortgage costs would increase. That wouldn't change rents (which would still be $2k), but instead of a house costing say $800k (2k/month allowing 800k loan at 3% interest), instead people could only borrow say 400k. That means that houses go down to 400k, but still cost the same per month. This is great for people with spare cash, as they can buy up those cheaper properties without having to pay the interest, and still get their $2k/month rent coming in. It's no change for people who want to buy for $2k/month, that's what they can afford, and it's going to be roughly the same as what it would cost to rent. It's terrible for people who want to sell and repay their equity, as the house price has suddenly halved. They bought it with an 800k loan, have repaid 10% of that, and owe 720k, now they can only sell for 400k. So they rent it out instead and rent somewhere else.

sologoub 5y ago

It cuts both ways - if it wasn’t for FHA and very easy borrowing for first time home buyers, many many more people would still be renting and likely not building at least some wealth/equity. By constraining the supply of loans, first and foremost you’d be cutting out those who need it most. Unfortunately, that’s how risk markets work - the riskiest (also usually the poorest) get cut first. The interest rate argument isn’t actually very grounded in fact - in order to save from refinancing, the rates have to have declined from where they were before. If rates stay flat, there is no benefits in refi - whether they stay flat at 5%, 3% or 10%, as long as the rates stay flat. However, borrowing at a lower rate is better because you end up putting more into the equity. If you borrow at zero percent, everything you pay in goes to reduce the principle and so long as the property doesn’t decline, you are building wealth. This is why arguing to reduce the loan supply to me is very counterproductive. What we need is better education and fewer predatory lending practices. Things like payday loans, etc, are currently predatory. Those could be reformed to serve the purpose they were originally intended for (emergency money), but until that happens, things like that create the actual problem, not the loan supply itself.

analyst74 5y ago
> many many more people would still be renting and likely not building at least some wealth/equity. This seems true intuitively, but if you think deeper, where does that accumulated wealth/equity come from? They are paid by future generations of regular people, or generational wealth transfer as some call it.
- sologoub 5y ago
  And if you pay rent, where does that go? Especially when renting from a large company? Better more folks accumulate at least something.

gnopgnip 5y ago

The market is not a zero sum game. If mortgages were illegal, the same houses would just be more expensive overall, and effectively most would be living in smaller or worse homes as a result.