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The 30-Year Mortgage Is an Intrinsically Toxic Product (2019)

64 points by vwoolf 5y ago

michelpp 5y ago
"Policies designed to help low-income people build wealth actually trap them at the worst possible time." Is that the bug, or the feature?
- tehjoker 5y ago
  When they get foreclosed on Black Rock or whoever is the popular financier of the day will just scoop them up.
mkoubaa 5y ago
But rents go up even though the mortgage rate is locked in. In some markets a bad 30 year mortgage turns into a great deal 10 years later. I would argue expensive single family homes in supply restricted markets is a toxic product
- cammikebrown 5y ago
  It’s all bad. I’m not able to save up for a down payment, even if I wanted to buy a home (which I don’t, I want to keep moving around places and I’d rather not worry about maintenance, property taxes, etc.) I feel bad for those who do want to buy and are priced out.
  - xwdv 5y ago
    They can always put a smaller down payment and just pay for the PMI so don’t feel too bad. Many people who aren’t buying are really just trying to time the market, it’s not because they can’t put a down payment. No one wants to be caught bag holding a house that may be worth a lot less in a few years.
    - doom2 5y ago
      > They can always put a smaller down payment and just pay for the PMI so don’t feel too bad. Which brings up another piece of "conventional" homebuying: the need for a 20% down payment. Many Americans are still taught this magic number, but the reality in many big cities is that you won't always be able to afford that amount.
      - xwdv 5y ago
        You can do 5% down.
        cammikebrown 5y ago
        5% down on $600,000 is still $30k, which is at least six months’ salary for many, many people. I know HN skews wealthy but the average median family income in California is $75k. Good luck!
        xwdv 5y ago
        You can keep moving the goal posts, but eventually you must face the moment of truth. If you’re not willing to work hard for a year and put the money down you do not get to own a home. There is no amount of downpayment people will ever be comfortable with, people simply want to have no downpayment at all and jump straight into mortgage payments.
        AnimalMuppet 5y ago
        If you're making $60K/year, I'm not sure that it's reasonable for you to have a $600/000 mortgage, completely apart from the down payment. You might be able to afford it with a 0% loan, but there aren't many of those...
- klodolph 5y ago
  The mortgage rate is locked in, but that doesn’t save you—if you have a high mortgage rate the rates could go down (but you’re locked in and can’t benefit unless you refinance), if you have a low mortgage rate then the principal is higher.
  - sokoloff 5y ago
    If rates go down, you're locked in unless you do this very obvious and fairly painless thing.
    - klodolph 5y ago
      “Obvious and painless” but not inexpensive. If it were trivial to refinance, you’d effectively have a variable rate mortgage where the rates could only go down, not up.
      - sokoloff 5y ago
        That is more or less how I view my mortgage. I bought in 2007 at 6.5%, refinanced in 2011 to 4.25%, then again a few years later to 3.625%, and plan to refinance again soon if I can lock in a 2.75%, no-points sometime soon. There are no points, no closing costs refis available. The biggest hassle in refinancing is making copies/uploading 2 years of tax returns and whatever other paperwork the underwriters want.
      - wbond 5y ago
        If you deal with a small local bank, you may be able to get a portfolio mortgage that they hold, with some unique benefits. I recently did this, they matched the rate my existing lender (big international bank) gave me, plus they offer a float down on the rate once per 12 months for a fixed fee of $975. No refinance necessary.
      - ummonk 5y ago
        That’s exactly what it is, which is why the rate is higher than an actual variable rate mortgage (where rates can go up too).
- Retric 5y ago
  I personally move around enough that transaction costs from home ownership would have been larger than the rent I actually paid.
- mgh2 5y ago
  What are the long term consequences of investing in real state? Sure, you will have some who can't afford to own, but for those who can, aren't they growing the economy? Think about the externalities, the fed prints money whenever the economy is in trouble and needs help (ex: recession, pandemic), this money is to be well invested for growth (real state, stocks, etc.): this injection/debt engenders more jobs, construction, population and demand growth. As long as this last part is done right [more money supply = more production] the economy will be kept healthy. The problem arises when the above equation does not balance out- ex: Argentina, Greece, Turkey, etc. (i.e. crypto arguments), when people and governments do not produce to justify that investment (aka corruption and stealing). Money's purpose is to be used for growth, so unlike the popular view of "inflating fiat steals your money", I don't think people understand money's purpose in the 1st place. Except for artificially supply restricted markets (ex: single family zoning in California [recently abolished] or money laundering on empty homes in Canada, UK & Australia), mortgages are not intrinsically toxic.
  - mgh2 5y ago
    *Edit: The problem arises when the above equation does not keep pace with growth- you can be in debt as long as you are also growing
ARandomerDude 5y ago
I love the 30 year mortgage. I buy a home I couldn't afford in cash or with a substantially shorter term note, live in the house 2-4 years then sell it for a profit with no prepayment penalty. I've done that 4 times in a row each time being able to buy a house that's perfect for my family's needs at the moment. The real problems, in my opinion, are (1) people go all-in for their "forever home" only to discover most people don't stay that long, and (2) people view themselves as owners rather than future sellers. Understand your house is a leveraged investment and you'll do well.
- luckyscs 5y ago
  Your buys happened to coincidence with the peaking of the housing demand in the US. Are you temporarily lucky or does this advice hold true for everyone forever?
  - ARandomerDude 5y ago
    How much good advice holds true for everyone forever? Use this kind of stylus and don't pick a fight with the Babylonians may have been great advice, even if it wasn't eternal.
- SavantIdiot 5y ago
  > Understand your house is a leveraged investment and you'll do well. Your primary house is not an investment, because if you sell it you are now homeless. This is literally the first thing any RIA or CFPA teaches you.
  - globular-toast 5y ago
    No you're not. You should be able to afford many years of rent with the cash from selling a house.
    - danielrpa 5y ago
      Renting isn't like owning a house. You can be kicked out of your rental unit if your landlord decides to do a number of things, such as converting your rental to a condo or sell the property. Rents can go up arbitrarily. A paid off house gives you a type of stability, belonging and security that rentals don't generally offer (at the expense of flexibility and mobility). I'm not trying to say that owning is better than renting, just that they are different enough for the "buying your house isn't an investment" statement to be mostly true.
Mc91 5y ago
I normally don't talk to people much about real estate, house prices, mortgages etc., but the local real estate market has heated up a little so I have been talking about these things with people more. One thing I did not expect is how many banks have waived the 20% down payment rule. If you pay some mortgage insurance you can buy a home with less than 20%. I have talked with people who managed to ante up 20%, and some who bought without 20% down. In light of the not-so-distant 2008 subprime mortgage bailout, some of what is happening surprised me a little. Obviously, that this is happening would have the tendency to inflate real estate prices.
- burlesona 5y ago
  The ability to pass less than 20% with PMI has been a thing for a long time... It was around before the 2008 crash and never went away afterwards. The bar to qualify for a mortgage went up, and has come back down some (though not all the way to pre-2008 levels), but PMI didn't really change AFAIK.
  - ghaff 5y ago
    I had a mortgage that had PMI for a time in the late 90s. (I could have afforded 20% but then I couldn't have afforded a bunch of improvements which the fixer-upper really needed.)
- onion2k 5y ago
  Most young people don't earn even close to enough to save 20% of the cost of a house. Without those people (first time buyers) entering the market the entire market grinds to a halt as there's no one to buy on one end of a chain. The bank's mortgage businesses would collapse. They had to start offering alternatives to down payments.
  - closeparen 5y ago
    How can it be that they earn enough to make the monthly payments, then?
amelius 5y ago
Lend people money so they have more to spend, and lo and behold, prices go up. But now you are in the same situation as before except you are in debt.
- kerneloftruth 5y ago
  You just described the effects of the student loan industry, too.
- SavantIdiot 5y ago
  That's what happens without regulation (limits on the size of the loan) or inflationary controls (rate increases). Lending exists to help amortize the cost of a big-ticket purchase so that they can grow and have security, as a business or a person/family. But when you take away the guardrails you have runaway student loan and mortgage debt. At least with the latter there is an asset that has some value.
leroman 5y ago
Two groups betting against each other - the one who is betting the prices go up (and buys houses) - the second who is staying out of the market claiming it’s a bubble In the center, there’s the interest rate, where the first group claims needs to stay low so they can win/survive, but if it does, the second group loses.
- chasebank 5y ago
  But isn't that the problem? People are incentivized to purchase homes as a speculative asset instead of what a house should be purchased for, um, ugh, housing.
  - Gigachad 5y ago
    I don’t see how it’s possible to not incentivise that. Houses have a huge amount of real value and would be expensive even without the land scarcity. If you are spending a lot of money on an asset, it always has to include some analysis on investment because you always have the option to not buy and put that money on a productive investment instead.
xupybd 5y ago
I could only afford a 30 year term. Now I'm half way through my mortgage 5 years later. You don't have to stick to the original repayments.
- tkojames 5y ago
  Very true I am taking the opposite bet. I refinanced last year 30 year 2.85 apr. In California so prop 13 means property taxes won't go up to fast. I have no plans to pay it off earlier. But we are kinda stuck we can sell our house for a nice profit on what I paid 5 years ago. Then I have to pay for another house that is expensive in the current marketing. Not really looking to relocate to cheaper place. So I am just hoping all the money I am putting in the stock market ends up being the right call. Who knows though. Either approach could be a good choice in the right situation.
  - xupybd 5y ago
    Yeah that is a great way to go if you're comfortable taking on the risk. There is a big reward if it pays off. I'm a bit more risk adverse but each person has a level of risk that works for them.
- koheripbal 5y ago
  You have to balance the returns of the market vs the cost of the mortgage. In many cases it makes more sense not to pay off the mortgage and just put excess cash into the market. I could pay off my mortgage at any time, but I've earned more by putting that cash in equities. I treat my 30 yr mortgage like a low interest loan. I basically take the risk that the mortgage lender doesn't want.
  - sys_64738 5y ago
    The mental relief of paying off a mortgage is much greater than any mortgage repayment schedule. The day people pay off their mortgage and own it outright is up there with birth of kids.
  - xupybd 5y ago
Hackbraten 5y ago
> I expect rates vol to rise in the future, so I’d better be long gamma right now. What have I done wrong in my life so I can no longer understand news articles?
- barry-cotter 5y ago
  This isn't a news article. It's a newsletter that targets people who care about finance and everything else, but definitely finance. Rates vol means volatility in rates of interest. Long gamma means has investements for which the thesis (bet) is that gamma will rise, whatever gamma is.
  - ZephyrBlu 5y ago
    Gamma is one of the greeks. They are used in finance to describe derivatives related to options. https://www.investopedia.com/terms/g/greeks.asp https://www.investopedia.com/terms/g/greeks.asp
  - conformist 5y ago
    "Long Gamma" in sloppy-Black-Scholes-lingo means essentially to bet on increasing realised vol, i.e., in this case on rates moving a lot, regardless of the direction. Cf https://quant.stackexchange.com/questions/39619/gamma-pnl-vs-vega-pnl https://quant.stackexchange.com/questions/39619/gamma-pnl-vs...
- SilasX 5y ago
  The article’s point there was that the average Joe’s actions under the current mortgage system could make sense, if they were based on a deep understanding of financial markets (including the subtleties of options trading) and were betting on increased volatility of interest rates. If the sentence doesn’t make sense, that’s arguable part of the point: the author wants you to react, “huh, average people don’t think like that, so of course that’s not a rational bet”, which is his point. But if you want to understand the volatility/gamma dynamic and strategy the author is referring to, this gives some detail. I’ll summarize it myself once I catch up and feel I understand it. https://seekingalpha.com/article/181382-option-strategy-long-gamma-short-vega https://seekingalpha.com/article/181382-option-strategy-long...
deleted 5y ago
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SavantIdiot 5y ago
That's a lot of analysis. I couldn't hang on that long because OP had so many arguments. However, something has to put the breaks on rising house costs like OP says, or we're heading back to pre-1930's where 60% of the population rented. OP is right, 30 year mortgages are a way to increase prices, like what's happening in car loans: 48 month used to be the norm (80's, 90's), but now I've seen 120 month loans. 10 years to pay off a car. Yeesh. Mortgage deduction elimination for non-primary residences is a start: that's gov't subsidy of investors. Once mortgage interest rates go back above 6% that might at least flatline prices instead of this crazy exponential.
- sokoloff 5y ago
  Loans for profit seeking businesses are deductible by default. (They're an "ordinary and necessary" business expense.) We can pass any law we want, of course, but I doubt that we're going to see the elimination of commercial mortgage deductibility in my lifetime.
alkonaut 5y ago
From the perspective of my European 100 year mortgage, 30 year fixed seems it cuts down the prices in absolute terms which offloads the risk from the buyer a bit. I wish there were laws limiting the length of mortgages to say 10 years. That would mean I had bought my house at 1/10th the price and thus at 1/10th the risk. But the question is of course is a mortgage seen as someone "paying off" a house, or simply a rent to the bank? I never intended to purchase/repay my house. The 100 year home loan is how I rent and the bank is my landlord. I take a lot of the risk for changes in the market, but also obviously the reward too (unlike a normal rental setup). I do pay it back (1/100 per year) but obviously my horizon for living in the home isn't 100 years. It's both in mine and my banks interest that my mortgage is kept at some level which is less than "one bad dip below market value", or say 2/3 or 12 of current market value. Once there, I'd rather invest the money than pay back more on the mortgage. Especially if interest rates are (a deductible) 1.5% and low risk investment yields several times that!
- deleted 5y ago
  [deleted]
- brianwawok 5y ago
  You can get an interest only mortgage in the US. Removes the illusion of paying it off. Functional, it would be very very close to a 100 year mortgage (few less dollars per month that goes to principle).. Remember though, for a big part of the US, paying off your mortgage is the most important / biggest form of retirement savings. Many people make it their goal to pay off their mortgage before they retire, even if their 401k is dry. With social security and modest lifestyle, it's not a terrible decision. You can even reverse mortgage if the well runs dry a few years early..
  - alkonaut 5y ago
    Yes, they used to be interest only here before, the 1% (or 2% for the first part) was added in response to risks. So basically the 1% is just that, retirement savings. Because at the end of the day it doesn't really matter whether it's 1/30 of a 30yr mortgage or 1/100 of a 100yr mortgage, that amount will be exactly what the buyer can afford. So after 30 years I'll have a home with around 1/2 a mortgage remaining. And saving a massive slump in prices, that will be a big part of my retirement savings. Having a completely paid off 30yr mortgage would be even better of course, but not hugely so. The amount left as "savings" is still the same. The longer mortgage just holds a larger risk/reward of passive income vs loss.
cletus 5y ago
A lot of these "analyses" ignore one simple fact: you need to live somewhere. The way I describe this is that you constantly have a short position on the local real estate market. If rents go up, you lose. If house prices go up, you lose. If either goes down, you win. That's a short position. So I view buying real estate as essentially canceling out your short position. Think about it: if the local market moves, it largely doesn't affect you. You can argue if you're underwater, it's bad. It's not good but your actual liability tends to be limited, particularly in no recourse states. For those unfamiliar, no recourse states give the lender the option to foreclose on the property if it's in default or to go after you for the debt. They can't do both. The author claims mortgages trap the poor in bad investments. The counterargument to that is you give stability to those who are most likely to be priced out by rent hikes and forced to move. Efforts to avoid that (eg rent control) don't really solve anything and just create the same problems that incumbent home ownership does: first come, first served. The author bemoans the lack of labour market flexibility with higher home ownership. This is true but is it bad? You have to remember he's talking about the 1930s when people were destitute and were forced to chase work. Should this really be a policy goal? The lack of the 30 year mortgage would likely disproportionately affect poor people. Real estate does need reform. I think we need to stop allowing funds and the super-rich to park money in real estate. Cities should be for those who live in the city, not Russian oligarchs who are anonymously "investing" via a REIT. We also need to stop subsidizing ultra-luxury building as happens in NYC (eg 421a abatements). But the 30 year mortgage? This feels like an attack on the most economically vulnerable to me. EDIT: corrected "negative short" to "short".
- chis 5y ago
  I've never heard anyone describe the implicit "negative short" all renters have for housing but that totally makes sense. I wonder what the takeaway is for someone who isn't interested in buying a house soon - maybe individuals should be investing in residential REITs which match the kind of housing they pay for? Buying real estate doesn't exactly "cancel out" your negative short position. On a long enough time horizon everyone who buys a house will end up selling it. Plus buying a house requires you to take money out of other investments, like stocks.
pdonis 5y ago
While the author makes plenty of good observations, there is a huge elephant in the room that he leaves out: the main problem with mortgage loans currently is that the government prints money to fund them. I don't understand how the author could have a whole section on the lender's perspective that starts with the question "Who supplies the capital for mortgages, and what are they getting out of it?" and never give the obvious answer: "The government supplies it, and gets more political power out of it by making more institutions dependent on the government".
- chiefalchemist 5y ago
  Furthermore, it perpetuates the myth that Uncle Sam sides with the citizens / voters. The dependency drives up price which makes "affordable" an illusion. Banks are happy to say the least. The gov? It's happy as well. The citizen / homeowner? Well, if they did the math they would not be pleased.
quitit 5y ago
It's only toxic for people who don't do anything with it. Even in Australia where real estate prices are insane the average 30 year loan is paid off in 14 years (note this is longer than earlier times.) Also the ability to refinance the loan can allow a person to take advantage of equity to either purchase additional properties or reduce their monthly dues. If the property is rented this can be the difference between the property requiring funds every month to one that makes the owner money every month - at which point it really doesn't matter what the duration of the loan is, because it's now producing income.
- User23 5y ago
  Why would I want to sell investments that are returning an average of 7+% a year to pay off a mortgage that I'm paying 2.9% on? The bank is welcome to let me use their money. Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.
  - globular-toast 5y ago
    Because "investments" could stop returning 7% at any time, mortgage interest rates could rise at any time and you can live in a house, you can't live in stocks and shares.
    - sokoloff 5y ago
      The overwhelming majority of mortgages in the US are fixed-rate products (at this time of low interest rates). Interest rates can do whatever they want from here and it won't affect the typical existing mortgage. (If they go high enough, a legacy low-rate mortgage becomes even more valuable to continue to hold.)
      - globular-toast 5y ago
        How long are they fixed for? I don't know anyone to be on longer than a 3 year fix in the UK.
treelovinhippie 5y ago
naveen99 5y ago
but residential real estate is a smaller fraction of wealth in the usa, than almost every other country on earth.
- naveen99 5y ago
  also mortgage interest subsidies and below market rates for low income mortgages are balanced by local property taxes and stricter building requirements in the usa. Most other countries don’t have the same local property taxes.
WalterBright 5y ago
I vote "toxic" and its cousin "optics" as the most pretentious, overused meme words of the last 5 years.
dang 5y ago
Discussed at the time: The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)
- SilasX 5y ago
  Neat! But also really aged poorly how they seems to think mortgage rates price in inflation, now that rates hover at 3% with inflation this year at 6. https://news.ycombinator.com/item?id=18830096 https://news.ycombinator.com/item?id=18830096
Ericson2314 5y ago
Public housing, land value tax, and land dividend please. All this garbage is pointlessly complex. Pricing owership is needlessly complex. Rent all the way down to dividends at the bottom, please.
- Ericson2314 5y ago
  To be clear, I mean the privately owned single family homes in suburbia system, not this analysis.
fleddr 5y ago
For housing to be solved, we need to reorganize society. It's not a supply problem, it's a demand problem. Everybody want to live in the same dense hotspots, creating a perpetual upward pressure in local prices. Not even the most powerful instrument, interest rates, solve this problem. You only need as many buyers as there is supply. It doesn't matter if 99% can't afford it, if 1% is enough to buy up the limited supply of houses, no matter the interest rate. Not even a massive economic crash brings relief. Because the underlying demand is still there, and so is the limited supply. The temporary discount is usually not used (scared buyers) and most home owners just sit it out until prices inevitably come back. There isn't going to be a "houses now 50% off" moment, ever. You can win a battle against NIMBY but it won't win the war. The demand keeps coming and supply cannot sustainably keep up. Hence my simple take. You're trying to squeeze an infinite amount of people and buildings into a tiny space that is not infinite. Instead of doubling down on this idiotic idea, reorganize society. There isn't going to be a "tweak" that fixes it. It cannot be fixed with this line of thinking. It requires new thinking.
jimmyvalmer 5y ago
This hit piece is typical of finance-bro screeds (and really, all economic editorials) where up can be down and left can be right depending on what you're promoting.

64 points by vwoolf 5y ago

"Policies designed to help low-income people build wealth actually trap them at the worst possible time." Is that the bug, or the feature?

tehjoker 5y ago
When they get foreclosed on Black Rock or whoever is the popular financier of the day will just scoop them up.

mkoubaa 5y ago

But rents go up even though the mortgage rate is locked in. In some markets a bad 30 year mortgage turns into a great deal 10 years later. I would argue expensive single family homes in supply restricted markets is a toxic product

cammikebrown 5y ago
It’s all bad. I’m not able to save up for a down payment, even if I wanted to buy a home (which I don’t, I want to keep moving around places and I’d rather not worry about maintenance, property taxes, etc.) I feel bad for those who do want to buy and are priced out.
- xwdv 5y ago
  They can always put a smaller down payment and just pay for the PMI so don’t feel too bad. Many people who aren’t buying are really just trying to time the market, it’s not because they can’t put a down payment. No one wants to be caught bag holding a house that may be worth a lot less in a few years.
  - doom2 5y ago
    > They can always put a smaller down payment and just pay for the PMI so don’t feel too bad. Which brings up another piece of "conventional" homebuying: the need for a 20% down payment. Many Americans are still taught this magic number, but the reality in many big cities is that you won't always be able to afford that amount.
    - xwdv 5y ago
      You can do 5% down.
      - cammikebrown 5y ago
        5% down on $600,000 is still $30k, which is at least six months’ salary for many, many people. I know HN skews wealthy but the average median family income in California is $75k. Good luck!
        xwdv 5y ago
        You can keep moving the goal posts, but eventually you must face the moment of truth. If you’re not willing to work hard for a year and put the money down you do not get to own a home. There is no amount of downpayment people will ever be comfortable with, people simply want to have no downpayment at all and jump straight into mortgage payments.
        AnimalMuppet 5y ago
        If you're making $60K/year, I'm not sure that it's reasonable for you to have a $600/000 mortgage, completely apart from the down payment. You might be able to afford it with a 0% loan, but there aren't many of those...
klodolph 5y ago
The mortgage rate is locked in, but that doesn’t save you—if you have a high mortgage rate the rates could go down (but you’re locked in and can’t benefit unless you refinance), if you have a low mortgage rate then the principal is higher.
- sokoloff 5y ago
  If rates go down, you're locked in unless you do this very obvious and fairly painless thing.
  - klodolph 5y ago
    “Obvious and painless” but not inexpensive. If it were trivial to refinance, you’d effectively have a variable rate mortgage where the rates could only go down, not up.
    - sokoloff 5y ago
      That is more or less how I view my mortgage. I bought in 2007 at 6.5%, refinanced in 2011 to 4.25%, then again a few years later to 3.625%, and plan to refinance again soon if I can lock in a 2.75%, no-points sometime soon. There are no points, no closing costs refis available. The biggest hassle in refinancing is making copies/uploading 2 years of tax returns and whatever other paperwork the underwriters want.
    - wbond 5y ago
      If you deal with a small local bank, you may be able to get a portfolio mortgage that they hold, with some unique benefits. I recently did this, they matched the rate my existing lender (big international bank) gave me, plus they offer a float down on the rate once per 12 months for a fixed fee of $975. No refinance necessary.
    - ummonk 5y ago
      That’s exactly what it is, which is why the rate is higher than an actual variable rate mortgage (where rates can go up too).
Retric 5y ago
I personally move around enough that transaction costs from home ownership would have been larger than the rent I actually paid.
mgh2 5y ago
What are the long term consequences of investing in real state? Sure, you will have some who can't afford to own, but for those who can, aren't they growing the economy? Think about the externalities, the fed prints money whenever the economy is in trouble and needs help (ex: recession, pandemic), this money is to be well invested for growth (real state, stocks, etc.): this injection/debt engenders more jobs, construction, population and demand growth. As long as this last part is done right [more money supply = more production] the economy will be kept healthy. The problem arises when the above equation does not balance out- ex: Argentina, Greece, Turkey, etc. (i.e. crypto arguments), when people and governments do not produce to justify that investment (aka corruption and stealing). Money's purpose is to be used for growth, so unlike the popular view of "inflating fiat steals your money", I don't think people understand money's purpose in the 1st place. Except for artificially supply restricted markets (ex: single family zoning in California [recently abolished] or money laundering on empty homes in Canada, UK & Australia), mortgages are not intrinsically toxic.
- mgh2 5y ago
  *Edit: The problem arises when the above equation does not keep pace with growth- you can be in debt as long as you are also growing

ARandomerDude 5y ago

I love the 30 year mortgage. I buy a home I couldn't afford in cash or with a substantially shorter term note, live in the house 2-4 years then sell it for a profit with no prepayment penalty. I've done that 4 times in a row each time being able to buy a house that's perfect for my family's needs at the moment. The real problems, in my opinion, are (1) people go all-in for their "forever home" only to discover most people don't stay that long, and (2) people view themselves as owners rather than future sellers. Understand your house is a leveraged investment and you'll do well.

luckyscs 5y ago
Your buys happened to coincidence with the peaking of the housing demand in the US. Are you temporarily lucky or does this advice hold true for everyone forever?
- ARandomerDude 5y ago
  How much good advice holds true for everyone forever? Use this kind of stylus and don't pick a fight with the Babylonians may have been great advice, even if it wasn't eternal.
SavantIdiot 5y ago
> Understand your house is a leveraged investment and you'll do well. Your primary house is not an investment, because if you sell it you are now homeless. This is literally the first thing any RIA or CFPA teaches you.
- globular-toast 5y ago
  No you're not. You should be able to afford many years of rent with the cash from selling a house.
  - danielrpa 5y ago
    Renting isn't like owning a house. You can be kicked out of your rental unit if your landlord decides to do a number of things, such as converting your rental to a condo or sell the property. Rents can go up arbitrarily. A paid off house gives you a type of stability, belonging and security that rentals don't generally offer (at the expense of flexibility and mobility). I'm not trying to say that owning is better than renting, just that they are different enough for the "buying your house isn't an investment" statement to be mostly true.

Mc91 5y ago

I normally don't talk to people much about real estate, house prices, mortgages etc., but the local real estate market has heated up a little so I have been talking about these things with people more. One thing I did not expect is how many banks have waived the 20% down payment rule. If you pay some mortgage insurance you can buy a home with less than 20%. I have talked with people who managed to ante up 20%, and some who bought without 20% down. In light of the not-so-distant 2008 subprime mortgage bailout, some of what is happening surprised me a little. Obviously, that this is happening would have the tendency to inflate real estate prices.

burlesona 5y ago
The ability to pass less than 20% with PMI has been a thing for a long time... It was around before the 2008 crash and never went away afterwards. The bar to qualify for a mortgage went up, and has come back down some (though not all the way to pre-2008 levels), but PMI didn't really change AFAIK.
- ghaff 5y ago
  I had a mortgage that had PMI for a time in the late 90s. (I could have afforded 20% but then I couldn't have afforded a bunch of improvements which the fixer-upper really needed.)
onion2k 5y ago
Most young people don't earn even close to enough to save 20% of the cost of a house. Without those people (first time buyers) entering the market the entire market grinds to a halt as there's no one to buy on one end of a chain. The bank's mortgage businesses would collapse. They had to start offering alternatives to down payments.
- closeparen 5y ago
  How can it be that they earn enough to make the monthly payments, then?

amelius 5y ago

Lend people money so they have more to spend, and lo and behold, prices go up. But now you are in the same situation as before except you are in debt.

kerneloftruth 5y ago
You just described the effects of the student loan industry, too.
SavantIdiot 5y ago
That's what happens without regulation (limits on the size of the loan) or inflationary controls (rate increases). Lending exists to help amortize the cost of a big-ticket purchase so that they can grow and have security, as a business or a person/family. But when you take away the guardrails you have runaway student loan and mortgage debt. At least with the latter there is an asset that has some value.

leroman 5y ago

Two groups betting against each other - the one who is betting the prices go up (and buys houses) - the second who is staying out of the market claiming it’s a bubble In the center, there’s the interest rate, where the first group claims needs to stay low so they can win/survive, but if it does, the second group loses.

chasebank 5y ago
But isn't that the problem? People are incentivized to purchase homes as a speculative asset instead of what a house should be purchased for, um, ugh, housing.
- Gigachad 5y ago
  I don’t see how it’s possible to not incentivise that. Houses have a huge amount of real value and would be expensive even without the land scarcity. If you are spending a lot of money on an asset, it always has to include some analysis on investment because you always have the option to not buy and put that money on a productive investment instead.

xupybd 5y ago

I could only afford a 30 year term. Now I'm half way through my mortgage 5 years later. You don't have to stick to the original repayments.

tkojames 5y ago
Very true I am taking the opposite bet. I refinanced last year 30 year 2.85 apr. In California so prop 13 means property taxes won't go up to fast. I have no plans to pay it off earlier. But we are kinda stuck we can sell our house for a nice profit on what I paid 5 years ago. Then I have to pay for another house that is expensive in the current marketing. Not really looking to relocate to cheaper place. So I am just hoping all the money I am putting in the stock market ends up being the right call. Who knows though. Either approach could be a good choice in the right situation.
- xupybd 5y ago
  Yeah that is a great way to go if you're comfortable taking on the risk. There is a big reward if it pays off. I'm a bit more risk adverse but each person has a level of risk that works for them.
koheripbal 5y ago
You have to balance the returns of the market vs the cost of the mortgage. In many cases it makes more sense not to pay off the mortgage and just put excess cash into the market. I could pay off my mortgage at any time, but I've earned more by putting that cash in equities. I treat my 30 yr mortgage like a low interest loan. I basically take the risk that the mortgage lender doesn't want.
- sys_64738 5y ago
  The mental relief of paying off a mortgage is much greater than any mortgage repayment schedule. The day people pay off their mortgage and own it outright is up there with birth of kids.
- xupybd 5y ago

Hackbraten 5y ago

> I expect rates vol to rise in the future, so I’d better be long gamma right now. What have I done wrong in my life so I can no longer understand news articles?

barry-cotter 5y ago
This isn't a news article. It's a newsletter that targets people who care about finance and everything else, but definitely finance. Rates vol means volatility in rates of interest. Long gamma means has investements for which the thesis (bet) is that gamma will rise, whatever gamma is.
- ZephyrBlu 5y ago
  Gamma is one of the greeks. They are used in finance to describe derivatives related to options. https://www.investopedia.com/terms/g/greeks.asp https://www.investopedia.com/terms/g/greeks.asp
- conformist 5y ago
  "Long Gamma" in sloppy-Black-Scholes-lingo means essentially to bet on increasing realised vol, i.e., in this case on rates moving a lot, regardless of the direction. Cf https://quant.stackexchange.com/questions/39619/gamma-pnl-vs-vega-pnl https://quant.stackexchange.com/questions/39619/gamma-pnl-vs...
SilasX 5y ago
The article’s point there was that the average Joe’s actions under the current mortgage system could make sense, if they were based on a deep understanding of financial markets (including the subtleties of options trading) and were betting on increased volatility of interest rates. If the sentence doesn’t make sense, that’s arguable part of the point: the author wants you to react, “huh, average people don’t think like that, so of course that’s not a rational bet”, which is his point. But if you want to understand the volatility/gamma dynamic and strategy the author is referring to, this gives some detail. I’ll summarize it myself once I catch up and feel I understand it. https://seekingalpha.com/article/181382-option-strategy-long-gamma-short-vega https://seekingalpha.com/article/181382-option-strategy-long...

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SavantIdiot 5y ago

That's a lot of analysis. I couldn't hang on that long because OP had so many arguments. However, something has to put the breaks on rising house costs like OP says, or we're heading back to pre-1930's where 60% of the population rented. OP is right, 30 year mortgages are a way to increase prices, like what's happening in car loans: 48 month used to be the norm (80's, 90's), but now I've seen 120 month loans. 10 years to pay off a car. Yeesh. Mortgage deduction elimination for non-primary residences is a start: that's gov't subsidy of investors. Once mortgage interest rates go back above 6% that might at least flatline prices instead of this crazy exponential.

sokoloff 5y ago
Loans for profit seeking businesses are deductible by default. (They're an "ordinary and necessary" business expense.) We can pass any law we want, of course, but I doubt that we're going to see the elimination of commercial mortgage deductibility in my lifetime.

alkonaut 5y ago

From the perspective of my European 100 year mortgage, 30 year fixed seems it cuts down the prices in absolute terms which offloads the risk from the buyer a bit. I wish there were laws limiting the length of mortgages to say 10 years. That would mean I had bought my house at 1/10th the price and thus at 1/10th the risk. But the question is of course is a mortgage seen as someone "paying off" a house, or simply a rent to the bank? I never intended to purchase/repay my house. The 100 year home loan is how I rent and the bank is my landlord. I take a lot of the risk for changes in the market, but also obviously the reward too (unlike a normal rental setup). I do pay it back (1/100 per year) but obviously my horizon for living in the home isn't 100 years. It's both in mine and my banks interest that my mortgage is kept at some level which is less than "one bad dip below market value", or say 2/3 or 12 of current market value. Once there, I'd rather invest the money than pay back more on the mortgage. Especially if interest rates are (a deductible) 1.5% and low risk investment yields several times that!

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brianwawok 5y ago
You can get an interest only mortgage in the US. Removes the illusion of paying it off. Functional, it would be very very close to a 100 year mortgage (few less dollars per month that goes to principle).. Remember though, for a big part of the US, paying off your mortgage is the most important / biggest form of retirement savings. Many people make it their goal to pay off their mortgage before they retire, even if their 401k is dry. With social security and modest lifestyle, it's not a terrible decision. You can even reverse mortgage if the well runs dry a few years early..
- alkonaut 5y ago
  Yes, they used to be interest only here before, the 1% (or 2% for the first part) was added in response to risks. So basically the 1% is just that, retirement savings. Because at the end of the day it doesn't really matter whether it's 1/30 of a 30yr mortgage or 1/100 of a 100yr mortgage, that amount will be exactly what the buyer can afford. So after 30 years I'll have a home with around 1/2 a mortgage remaining. And saving a massive slump in prices, that will be a big part of my retirement savings. Having a completely paid off 30yr mortgage would be even better of course, but not hugely so. The amount left as "savings" is still the same. The longer mortgage just holds a larger risk/reward of passive income vs loss.

cletus 5y ago

A lot of these "analyses" ignore one simple fact: you need to live somewhere. The way I describe this is that you constantly have a short position on the local real estate market. If rents go up, you lose. If house prices go up, you lose. If either goes down, you win. That's a short position. So I view buying real estate as essentially canceling out your short position. Think about it: if the local market moves, it largely doesn't affect you. You can argue if you're underwater, it's bad. It's not good but your actual liability tends to be limited, particularly in no recourse states. For those unfamiliar, no recourse states give the lender the option to foreclose on the property if it's in default or to go after you for the debt. They can't do both. The author claims mortgages trap the poor in bad investments. The counterargument to that is you give stability to those who are most likely to be priced out by rent hikes and forced to move. Efforts to avoid that (eg rent control) don't really solve anything and just create the same problems that incumbent home ownership does: first come, first served. The author bemoans the lack of labour market flexibility with higher home ownership. This is true but is it bad? You have to remember he's talking about the 1930s when people were destitute and were forced to chase work. Should this really be a policy goal? The lack of the 30 year mortgage would likely disproportionately affect poor people. Real estate does need reform. I think we need to stop allowing funds and the super-rich to park money in real estate. Cities should be for those who live in the city, not Russian oligarchs who are anonymously "investing" via a REIT. We also need to stop subsidizing ultra-luxury building as happens in NYC (eg 421a abatements). But the 30 year mortgage? This feels like an attack on the most economically vulnerable to me. EDIT: corrected "negative short" to "short".

chis 5y ago
I've never heard anyone describe the implicit "negative short" all renters have for housing but that totally makes sense. I wonder what the takeaway is for someone who isn't interested in buying a house soon - maybe individuals should be investing in residential REITs which match the kind of housing they pay for? Buying real estate doesn't exactly "cancel out" your negative short position. On a long enough time horizon everyone who buys a house will end up selling it. Plus buying a house requires you to take money out of other investments, like stocks.

pdonis 5y ago

While the author makes plenty of good observations, there is a huge elephant in the room that he leaves out: the main problem with mortgage loans currently is that the government prints money to fund them. I don't understand how the author could have a whole section on the lender's perspective that starts with the question "Who supplies the capital for mortgages, and what are they getting out of it?" and never give the obvious answer: "The government supplies it, and gets more political power out of it by making more institutions dependent on the government".

chiefalchemist 5y ago
Furthermore, it perpetuates the myth that Uncle Sam sides with the citizens / voters. The dependency drives up price which makes "affordable" an illusion. Banks are happy to say the least. The gov? It's happy as well. The citizen / homeowner? Well, if they did the math they would not be pleased.

quitit 5y ago

It's only toxic for people who don't do anything with it. Even in Australia where real estate prices are insane the average 30 year loan is paid off in 14 years (note this is longer than earlier times.) Also the ability to refinance the loan can allow a person to take advantage of equity to either purchase additional properties or reduce their monthly dues. If the property is rented this can be the difference between the property requiring funds every month to one that makes the owner money every month - at which point it really doesn't matter what the duration of the loan is, because it's now producing income.

User23 5y ago
Why would I want to sell investments that are returning an average of 7+% a year to pay off a mortgage that I'm paying 2.9% on? The bank is welcome to let me use their money. Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.
- globular-toast 5y ago
  Because "investments" could stop returning 7% at any time, mortgage interest rates could rise at any time and you can live in a house, you can't live in stocks and shares.
  - sokoloff 5y ago
    The overwhelming majority of mortgages in the US are fixed-rate products (at this time of low interest rates). Interest rates can do whatever they want from here and it won't affect the typical existing mortgage. (If they go high enough, a legacy low-rate mortgage becomes even more valuable to continue to hold.)
    - globular-toast 5y ago
      How long are they fixed for? I don't know anyone to be on longer than a 3 year fix in the UK.

treelovinhippie 5y ago

naveen99 5y ago

but residential real estate is a smaller fraction of wealth in the usa, than almost every other country on earth.

naveen99 5y ago
also mortgage interest subsidies and below market rates for low income mortgages are balanced by local property taxes and stricter building requirements in the usa. Most other countries don’t have the same local property taxes.

WalterBright 5y ago

I vote "toxic" and its cousin "optics" as the most pretentious, overused meme words of the last 5 years.

dang 5y ago

Discussed at the time: The 30-Year Mortgage Is an Intrinsically Toxic Product - https://news.ycombinator.com/item?id=18829435 https://news.ycombinator.com/item?id=18829435 - Jan 2019 (126 comments)

SilasX 5y ago
Neat! But also really aged poorly how they seems to think mortgage rates price in inflation, now that rates hover at 3% with inflation this year at 6. https://news.ycombinator.com/item?id=18830096 https://news.ycombinator.com/item?id=18830096

Ericson2314 5y ago

Public housing, land value tax, and land dividend please. All this garbage is pointlessly complex. Pricing owership is needlessly complex. Rent all the way down to dividends at the bottom, please.

Ericson2314 5y ago
To be clear, I mean the privately owned single family homes in suburbia system, not this analysis.

fleddr 5y ago

For housing to be solved, we need to reorganize society. It's not a supply problem, it's a demand problem. Everybody want to live in the same dense hotspots, creating a perpetual upward pressure in local prices. Not even the most powerful instrument, interest rates, solve this problem. You only need as many buyers as there is supply. It doesn't matter if 99% can't afford it, if 1% is enough to buy up the limited supply of houses, no matter the interest rate. Not even a massive economic crash brings relief. Because the underlying demand is still there, and so is the limited supply. The temporary discount is usually not used (scared buyers) and most home owners just sit it out until prices inevitably come back. There isn't going to be a "houses now 50% off" moment, ever. You can win a battle against NIMBY but it won't win the war. The demand keeps coming and supply cannot sustainably keep up. Hence my simple take. You're trying to squeeze an infinite amount of people and buildings into a tiny space that is not infinite. Instead of doubling down on this idiotic idea, reorganize society. There isn't going to be a "tweak" that fixes it. It cannot be fixed with this line of thinking. It requires new thinking.

jimmyvalmer 5y ago

This hit piece is typical of finance-bro screeds (and really, all economic editorials) where up can be down and left can be right depending on what you're promoting.