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I also wish there was more about inflation risk. After being debt-averse my whole life, I finally got a mortgage in 2020 when the prevailing interest rate drop

I also wish there was more about inflation risk. After being debt-averse my whole life, I finally got a mortgage in 2020 when the prevailing interest rate dropped below the expected inflation rate. Because that meant real rates were negative, and sure, I'd love to get paid for taking out debt. At least so far, it's been a great trade, with me paying 2.75% on my mortgage and my home's value up about 35%. Out of morbid curiosity, I'd like to know who I'm screwing over. Somebody out there is getting a 2.75% cash flow in a 7% inflation environment. Is it my mom's pension fund? The Saudi sovereign wealth fund? Wells Fargo? The Federal Reserve, and hence everybody who pays for goods with dollars?

WJW 5y ago
Probably just future generations of taxpayers and/or the people you will eventually sell your house to?
throw0101a 5y ago
> After being debt-averse my whole life, I finally got a mortgage in 2020 when the prevailing interest rate dropped below the expected inflation rate. Now imagine actually having a mortgage with an interest rate that was negative: * https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la...
- smsm42 5y ago
  > In reality, the Jyske mortgage borrower in Denmark is likely to end up paying back a little more than they borrowed, as there are still fees and charges to pay to compensate the bank for arranging the deal, even when the nominal rate is negative. Ahhh, there it is. So they probably just make Central Bank finance their fees, using borrowers as a conduit. Clever.
ctchocula 5y ago
Vanguard's trademark total bond ETF BND, which is a part of the classic 3-fund portfolio [1], a cornerstone of passive investing, has 2.2% commercial and 20% government-backed mortgage backed securities [2]. So a lot of everyday folks across America, especially those retired looking for a stable cashflow for retirement, are helping fund your mortgage. It's a bit of win-win situation (albeit a loss for them during high inflation as you point out): you need money now, and they need a mostly guaranteed return on their money in 10-20 years time that pays out better than Treasuries, and gives them diversification compared to bonds (either Treasury or commercial). [1] https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio [2] https://investor.vanguard.com/mutual-funds/profile/portfolio/bnd https://investor.vanguard.com/mutual-funds/profile/portfolio...
mjul 5y ago
You are not screwing over anybody. It is a two-sided deal that both parties find good. The interest represents the time value of money, which may be different to each side. Maybe the other side thinks that the 7% inflation is just a short spike over the duration of the mortgage. Maybe they would like to get USD in the future from a stream of USD denominated mortgage payments if they think the dollar is going up relative to their own currency. Aside from the time value there may be other reasons, too: Maybe there are regulatory reasons forcing them to buy a certain amount of mortgages or bonds to diversify across asset classes with different risks. Or maybe it is just their own diversification strategy to do so. Financial risk relates to how much the value of an asset changes over time (its variance) so in many cases holding “too many” high-growth stocks in a portfolio is beyond the risk appetite for many investors. Lower yield more stable assets are desirable to balance this.
- y4mi 5y ago
  > You are not screwing over anybody. It is a two-sided deal that both parties find good. There are no situations in which every participants wins. There are always "losers" as long as there are finite resources. Like you said, both participants in the mentioned deal could be profiting, but there are more participants involved on the open market which are affected. The "losers" are often hard to determine, as the previous commenter correctly pointed out. Nonetheless, the wealth came from somewhere. If it really was "created" from the interaction then this creation causes inflation, effectively removing wealth from everyone holding the currency in which the money was "created". It's true that this particular deal will have a miniscule effect, but in does matter in aggregation with everyone else that made similar deals. Macroeconomics is a much more challenging topic then you seem to realize
  - Flip-per 5y ago
    > There are no situations in which every participants wins. There are always "losers" as long as there are finite resources. How about the comparative advantage that Ricardo developed in 1817? https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage
nvarsj 5y ago
You're screwing the people who have to pay much more to get on the property ladder than those before them. In essence, it's a transfer of wealth, predominantly from younger people (getting on the property ladder) to those who have been on it for a long time. What the younger generation will do when it's their turn (when most of them couldn't even afford to get on the ladder in the first place, nowadays), I don't know.
- shostack 5y ago
  Can you explain the "ladder" aspect of this?
  - ralferoo 5y ago
    The idea of the "property ladder" is that your first house is (relatively) cheap, and then as your get older your earnings increase and the old mortgage seems cheap, and maybe you now have children and want a bigger place, so you sell your property, hopefully making a profit on it, and buy something bigger that you couldn't have afforded before, and repeat. The reason for the ladder metaphor is that each house is a step towards the next bigger house, but if you hadn't bought the first house, probably you wouldn't have the increased equity available to make the more expensive house available to you. Likewise, with a ladder, you have to do all the steps in order.
smsm42 5y ago
I'm still not sure how comes we have inflation closing in to 10% but banks are willing to give me mortgages under 3%. Somebody is getting suckered here, and I suspect it's me, but I am not sure yet how. > Somebody out there is getting a 2.75% cash flow in a 7% inflation environment Everybody with cash savings, I guess. Savings rates are abysmal for a while now. Otherwise, not sure.

WJW 5y ago

Probably just future generations of taxpayers and/or the people you will eventually sell your house to?

throw0101a 5y ago

> After being debt-averse my whole life, I finally got a mortgage in 2020 when the prevailing interest rate dropped below the expected inflation rate. Now imagine actually having a mortgage with an interest rate that was negative: * https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la...

smsm42 5y ago
> In reality, the Jyske mortgage borrower in Denmark is likely to end up paying back a little more than they borrowed, as there are still fees and charges to pay to compensate the bank for arranging the deal, even when the nominal rate is negative. Ahhh, there it is. So they probably just make Central Bank finance their fees, using borrowers as a conduit. Clever.

ctchocula 5y ago

Vanguard's trademark total bond ETF BND, which is a part of the classic 3-fund portfolio [1], a cornerstone of passive investing, has 2.2% commercial and 20% government-backed mortgage backed securities [2]. So a lot of everyday folks across America, especially those retired looking for a stable cashflow for retirement, are helping fund your mortgage. It's a bit of win-win situation (albeit a loss for them during high inflation as you point out): you need money now, and they need a mostly guaranteed return on their money in 10-20 years time that pays out better than Treasuries, and gives them diversification compared to bonds (either Treasury or commercial). [1] https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio [2] https://investor.vanguard.com/mutual-funds/profile/portfolio/bnd https://investor.vanguard.com/mutual-funds/profile/portfolio...

mjul 5y ago

You are not screwing over anybody. It is a two-sided deal that both parties find good. The interest represents the time value of money, which may be different to each side. Maybe the other side thinks that the 7% inflation is just a short spike over the duration of the mortgage. Maybe they would like to get USD in the future from a stream of USD denominated mortgage payments if they think the dollar is going up relative to their own currency. Aside from the time value there may be other reasons, too: Maybe there are regulatory reasons forcing them to buy a certain amount of mortgages or bonds to diversify across asset classes with different risks. Or maybe it is just their own diversification strategy to do so. Financial risk relates to how much the value of an asset changes over time (its variance) so in many cases holding “too many” high-growth stocks in a portfolio is beyond the risk appetite for many investors. Lower yield more stable assets are desirable to balance this.

y4mi 5y ago
> You are not screwing over anybody. It is a two-sided deal that both parties find good. There are no situations in which every participants wins. There are always "losers" as long as there are finite resources. Like you said, both participants in the mentioned deal could be profiting, but there are more participants involved on the open market which are affected. The "losers" are often hard to determine, as the previous commenter correctly pointed out. Nonetheless, the wealth came from somewhere. If it really was "created" from the interaction then this creation causes inflation, effectively removing wealth from everyone holding the currency in which the money was "created". It's true that this particular deal will have a miniscule effect, but in does matter in aggregation with everyone else that made similar deals. Macroeconomics is a much more challenging topic then you seem to realize
- Flip-per 5y ago
  > There are no situations in which every participants wins. There are always "losers" as long as there are finite resources. How about the comparative advantage that Ricardo developed in 1817? https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage

nvarsj 5y ago

You're screwing the people who have to pay much more to get on the property ladder than those before them. In essence, it's a transfer of wealth, predominantly from younger people (getting on the property ladder) to those who have been on it for a long time. What the younger generation will do when it's their turn (when most of them couldn't even afford to get on the ladder in the first place, nowadays), I don't know.

shostack 5y ago
Can you explain the "ladder" aspect of this?
- ralferoo 5y ago
  The idea of the "property ladder" is that your first house is (relatively) cheap, and then as your get older your earnings increase and the old mortgage seems cheap, and maybe you now have children and want a bigger place, so you sell your property, hopefully making a profit on it, and buy something bigger that you couldn't have afforded before, and repeat. The reason for the ladder metaphor is that each house is a step towards the next bigger house, but if you hadn't bought the first house, probably you wouldn't have the increased equity available to make the more expensive house available to you. Likewise, with a ladder, you have to do all the steps in order.

smsm42 5y ago

I'm still not sure how comes we have inflation closing in to 10% but banks are willing to give me mortgages under 3%. Somebody is getting suckered here, and I suspect it's me, but I am not sure yet how. > Somebody out there is getting a 2.75% cash flow in a 7% inflation environment Everybody with cash savings, I guess. Savings rates are abysmal for a while now. Otherwise, not sure.