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Can someone explain this a bit more clearly ? > Consider what that means for the home buying market. Those of us fortunate enough to have 30 year fixed rate mo

Can someone explain this a bit more clearly ? > Consider what that means for the home buying market. Those of us fortunate enough to have 30 year fixed rate mortgages at about 3% are about to see our mortgage “debt” give us better returns than our stock holdings. Does this mean we should have borrowed as much as possible to buy a house when rates were low ?

readthenotes1 4y ago
Only if you believe rates will go higher and that you can take advantage of those higher rates. For example, Having assets on a fixed loan of 3% when you can get a CD of similar duration for 3.5% means you are making money by owing those assets and owing that loan. It is why deflation is such anathema to the financial industry. They don't want anyone but themselves to benefit from financial conditions.
- NhanH 4y ago
  In this example, you are borrowing the CD right?
  - MikeDelta 4y ago
    You buy the CD (and give the issuer your money on deposit against the rate of 3.5%)
    - UncleEntity 4y ago
      Which is the point of the article, you get 3.5% while the value of your money is -8.6% (or whatever the real rate of inflation is) so in the end you pay the bank to borrow your money.
      - ethbr0 4y ago
        If I follow the analogy right, the value of your debt is -8.6%. The path to beating inflation is (a) borrowing at fixed low rates before it kicks in & (b) buying some asset that appreciates at greater than inflation rates (or at least paces it).
InefficientRed 4y ago
> Does this mean we should have borrowed as much as possible to buy a house when rates were low ? Prices were also high. Time will tell.
- riku_iki 4y ago
  Most people refinanced low price mortgages.
  - InefficientRed 4y ago
    OP said "to buy a house".
- btmiller 4y ago
  I suspect refis massively benefited. I reduced my rate from 3.75% to 2.625% and with a cash out!
01100011 4y ago
> Does this mean we should have borrowed as much as possible to buy a house when rates were low ? Sort of. You should have borrowed as much as possible up to the level that, under nearly any circumstances, you could have still serviced that debt(i.e. made the payments). Historically, those were really cheap rates to borrow money and we might not see them again for a few years(or a few decades).
- rufusroflpunch 4y ago
  Next time we see them again, we will likely be in a hyperinflationary period, I would think. At some point in the future (not brave enough to say when), the Fed will run out of runway, credibility and backbone, and the easy money will never cease until the currency itself dies.
  - carom 4y ago
    We will see them again after the recession. They will stay low until at least 2030 then we will print ourselves out of low interest rates. Look at an long term interest rate cycle chart.
    - ethbr0 4y ago
      Also, folks forget that as nasty as inflation is... it's always good for borrowers of inflation-currency-denominated debt. Like, say, a USD$25T federal debt? Deflation (or even undershooting inflation) isn't an option.
adam_arthur 4y ago
The comment is implying that fixed rate debt below inflation is "free" money. Rate at 2% and inflation at 3% means an effective gain of 1% a year on the spread. It's wrong though. Home prices are likely to fall quite substantially if you actually look at all the fundamental data and cast it in the light of significantly higher mortgage rates. Higher inflation also raises the risk free rate which devalues assets. The stronger effect of the two will win out, and with valuations multiple standard deviations above the mean, the end result is pretty clear
- almost_usual 4y ago
  If rents continue to rise home prices won’t fall substantially. https://fred.stlouisfed.org/series/CUUR0000SEHA https://fred.stlouisfed.org/series/CUUR0000SEHA
  - gedy 4y ago
    I honestly feel like rents are at the breaking point, it's ridiculous in California at least and people I know who rent are leaving the state because of this.
    - bredren 4y ago
      In 2021, Portland, Oregon saw it’s population decline for the first time since 2010. This has been attributed to the high cost of housing. [1] The secretary of HUD was here a month ago taking a tour, talking about affordable housing. We started a family last year and despite needing to move out of a duplex, we would not seriously consider a purchase. Prices and terms of sale have been outrageous. Deciding our best bet was to rent, we found the rental market for single family homes a disaster. The only way we found something was because we know a postal worker who saw a for rent sign while walking their route. The place never hit the internet. The house needs a ton of work and the only way it can be priced the way it is is because the market is so totally busted. My wife tracked pricing and made a spreadsheet of comparable rentals when we signed the lease. I’d guess our rent was at least $400 under market. I grew up in Portland. I went to a portland public school and college in Oregon. I had wanted to live here. However, we need housing to show clear indications it will turn, an unexpected windfall, or we will move away from family here and toward other family in the mid-west. Regular people are desperate here, valley folks are coming in doing the same thing we would do to wherever we could land in the Midwest. Housing is broken. [1] https://www.wweek.com/news/city/2022/05/27/new-census-numbers-show-portlands-population-dropped-by-over-11000-people-from-2020-to-2021/ https://www.wweek.com/news/city/2022/05/27/new-census-number...
chrisco255 4y ago
God no, the real estate prices are about to plummet (higher interest rates kill demand) and being in max debt will crush you in a recession.
alfiedotwtf 4y ago
> 30 year fixed rate mortgages Wait, what? Americans can fix for 30 years?!! The longest I've seen in Australia is 7 years fixed, but the usual home loan is 3-5 years fixed and then a renewal at the new market rate.
- Jacqued 4y ago
  Here in France people only ever do fixed rate, generally for 20 or 25 year mortgages. I have never heard of someone buying a home with a variable rate loan, not sure if it's even legal. It might have been a pretty good deal for the people who bought homes with 25 year 0.7-0.9% interest rate mortgages these last few years.
  - kgwgk 4y ago
    Variable rate loans do exist in France and they were relatively popular 15-20 years ago (up to 38% share). https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=304.RAI.M.FR.SVLHPHH.EUR.MIR.Z https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=304.RAI.M....
  - alfiedotwtf 4y ago
    As an Australian, fascinating! I would guess that Tue majority of home loans here are variable. Another question - with a normal fixed interest loan for 30 years, does that normally include paying off the principal? I.e after the 30 years, the loan is paid off? Here, fixed interest usually don't pay down the loan whereas a variable loan pays down 100% of the principal after the 30 years
    - Jacqued 4y ago
      Yes you do pay down the principal. Non-amortized mortgage loans might exist but if they do they're definitely marginal.
- rvense 4y ago
  In Denmark, 30 years fixed rate is the standard mortgage. I think it was basically the only way to own a home until "liberalizations" in 2002, and some of the more.. creative financial products that showed up are what ended up causing trouble after 2007.
tinus_hn 4y ago
Considering the house increases in value faster than the debt increases due to interest borrowing to buy a house has turned out to be profitable. Of course the reality is that the 30 years aren’t over and it’s all about risks, this is a gamble where the buyer was lucky.
trashtester 4y ago
> Does this mean we should have borrowed as much as possible to buy a house when rates were low ? I refinanced my morgage in spring 2020, up to the maximum allowed at the lowest interest rate bracket. The main reason was to ensure that I had liquidity, in case the economoy would crash much harder than it did in 2020, the secondary motive would be to take advantage of investment opportunities that might show up even if the credit market would crash (potentially making it hard to borrow). Until now, I've been paying about 1% over the floating interest rate, but made a good profit from the money, most of which was put into index funds, even if half the profit has been lost this year. I've moved half my index fund holdings into index funds focusing on commodities, hoping that these will hold better than generic index funds if inflation stays high. I don't belive central banks will be able to bring inflation under control on the first attempt. Instead, I predict that interest rates will go up until a moderate/strong recession causes people to enter the streets, and that QE and lower rates will follow for a time period, causing drawn-out stagflation, which is why I dont want to have too much in cash. I do have about 30% in cash, still, in case the market falls much further than it already has.
carom 4y ago
Your debt is losing value at the rate of inflation, and you are paying less than the rate of inflation for that debt. If I'm paying 2.9% on -800k and that -800k is inflated away at 8.6% then I'm making 5.7%.
- chasd00 4y ago
  But isn’t this assuming your pay increases at the rate of inflation? If your pay doesn’t increase then you don’t get any benefit of high inflation against your debt.
  - carom 4y ago
    Or the asset you bought with that debt, as real estate has normally kept pace with inflation. Or stocks. Both might see temporary shocks though.
neffy 4y ago
Yes, if you are living in the US, and could access fixed rate mortgages. Or indeed anywhere where a fixed rate mortgage for a reasonable 5+ year term is available. Because the money supply is in some sense linked to house lending by the banks these days (not the entire source, but a lot of it), house prices will increase in tandem with the money supply, that is fairly guaranteed. For the rest, look to the latter part of the 1970´s, which is what happens in the US, when following a long period of low inflation, inflation and higher interest rates kick in to create this situation. TLDR, it isn't pretty for the lenders (banks, savings and loan, pension funds) who get stuck with the low interest rate long term loans. But that's prequelling the next financial crisis, not the current one.
cykros 4y ago
I'm not sure about borrowing as much as possible (though publicly traded companies sure did buffer their balance sheets with low cost debt). I am sure though that I won't be pre-paying my mortgage at any point, given that it's more economic to buy savings bonds, use the yield to pay the interest on the mortgage, and pocket the difference. Never mind comparing to the yield on positively performing risk assets once the markets stop seizing up (and if they don't, we all have bigger problems anyway). Taking on as much debt as possible is rarely the best idea, especially if your income could at all have been at risk at any point. But yes, with interest rates as low as they were for years, more than average was probably a pretty good idea as long as it was within one's means to support. The Fed lowers interest rates as a means of stimulating the economy, and as the old adage goes, "Don't fight the Fed."

readthenotes1 4y ago

Only if you believe rates will go higher and that you can take advantage of those higher rates. For example, Having assets on a fixed loan of 3% when you can get a CD of similar duration for 3.5% means you are making money by owing those assets and owing that loan. It is why deflation is such anathema to the financial industry. They don't want anyone but themselves to benefit from financial conditions.

NhanH 4y ago
In this example, you are borrowing the CD right?
- MikeDelta 4y ago
  You buy the CD (and give the issuer your money on deposit against the rate of 3.5%)
  - UncleEntity 4y ago
    Which is the point of the article, you get 3.5% while the value of your money is -8.6% (or whatever the real rate of inflation is) so in the end you pay the bank to borrow your money.
    - ethbr0 4y ago
      If I follow the analogy right, the value of your debt is -8.6%. The path to beating inflation is (a) borrowing at fixed low rates before it kicks in & (b) buying some asset that appreciates at greater than inflation rates (or at least paces it).

InefficientRed 4y ago

> Does this mean we should have borrowed as much as possible to buy a house when rates were low ? Prices were also high. Time will tell.

riku_iki 4y ago
Most people refinanced low price mortgages.
- InefficientRed 4y ago
  OP said "to buy a house".
btmiller 4y ago
I suspect refis massively benefited. I reduced my rate from 3.75% to 2.625% and with a cash out!

01100011 4y ago

> Does this mean we should have borrowed as much as possible to buy a house when rates were low ? Sort of. You should have borrowed as much as possible up to the level that, under nearly any circumstances, you could have still serviced that debt(i.e. made the payments). Historically, those were really cheap rates to borrow money and we might not see them again for a few years(or a few decades).

rufusroflpunch 4y ago
Next time we see them again, we will likely be in a hyperinflationary period, I would think. At some point in the future (not brave enough to say when), the Fed will run out of runway, credibility and backbone, and the easy money will never cease until the currency itself dies.
- carom 4y ago
  We will see them again after the recession. They will stay low until at least 2030 then we will print ourselves out of low interest rates. Look at an long term interest rate cycle chart.
  - ethbr0 4y ago
    Also, folks forget that as nasty as inflation is... it's always good for borrowers of inflation-currency-denominated debt. Like, say, a USD$25T federal debt? Deflation (or even undershooting inflation) isn't an option.

adam_arthur 4y ago

The comment is implying that fixed rate debt below inflation is "free" money. Rate at 2% and inflation at 3% means an effective gain of 1% a year on the spread. It's wrong though. Home prices are likely to fall quite substantially if you actually look at all the fundamental data and cast it in the light of significantly higher mortgage rates. Higher inflation also raises the risk free rate which devalues assets. The stronger effect of the two will win out, and with valuations multiple standard deviations above the mean, the end result is pretty clear

almost_usual 4y ago
If rents continue to rise home prices won’t fall substantially. https://fred.stlouisfed.org/series/CUUR0000SEHA https://fred.stlouisfed.org/series/CUUR0000SEHA
- gedy 4y ago
  I honestly feel like rents are at the breaking point, it's ridiculous in California at least and people I know who rent are leaving the state because of this.
  - bredren 4y ago
    In 2021, Portland, Oregon saw it’s population decline for the first time since 2010. This has been attributed to the high cost of housing. [1] The secretary of HUD was here a month ago taking a tour, talking about affordable housing. We started a family last year and despite needing to move out of a duplex, we would not seriously consider a purchase. Prices and terms of sale have been outrageous. Deciding our best bet was to rent, we found the rental market for single family homes a disaster. The only way we found something was because we know a postal worker who saw a for rent sign while walking their route. The place never hit the internet. The house needs a ton of work and the only way it can be priced the way it is is because the market is so totally busted. My wife tracked pricing and made a spreadsheet of comparable rentals when we signed the lease. I’d guess our rent was at least $400 under market. I grew up in Portland. I went to a portland public school and college in Oregon. I had wanted to live here. However, we need housing to show clear indications it will turn, an unexpected windfall, or we will move away from family here and toward other family in the mid-west. Regular people are desperate here, valley folks are coming in doing the same thing we would do to wherever we could land in the Midwest. Housing is broken. [1] https://www.wweek.com/news/city/2022/05/27/new-census-numbers-show-portlands-population-dropped-by-over-11000-people-from-2020-to-2021/ https://www.wweek.com/news/city/2022/05/27/new-census-number...

chrisco255 4y ago

God no, the real estate prices are about to plummet (higher interest rates kill demand) and being in max debt will crush you in a recession.

alfiedotwtf 4y ago

> 30 year fixed rate mortgages Wait, what? Americans can fix for 30 years?!! The longest I've seen in Australia is 7 years fixed, but the usual home loan is 3-5 years fixed and then a renewal at the new market rate.

Jacqued 4y ago
Here in France people only ever do fixed rate, generally for 20 or 25 year mortgages. I have never heard of someone buying a home with a variable rate loan, not sure if it's even legal. It might have been a pretty good deal for the people who bought homes with 25 year 0.7-0.9% interest rate mortgages these last few years.
- kgwgk 4y ago
  Variable rate loans do exist in France and they were relatively popular 15-20 years ago (up to 38% share). https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=304.RAI.M.FR.SVLHPHH.EUR.MIR.Z https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=304.RAI.M....
- alfiedotwtf 4y ago
  As an Australian, fascinating! I would guess that Tue majority of home loans here are variable. Another question - with a normal fixed interest loan for 30 years, does that normally include paying off the principal? I.e after the 30 years, the loan is paid off? Here, fixed interest usually don't pay down the loan whereas a variable loan pays down 100% of the principal after the 30 years
  - Jacqued 4y ago
    Yes you do pay down the principal. Non-amortized mortgage loans might exist but if they do they're definitely marginal.
rvense 4y ago
In Denmark, 30 years fixed rate is the standard mortgage. I think it was basically the only way to own a home until "liberalizations" in 2002, and some of the more.. creative financial products that showed up are what ended up causing trouble after 2007.

tinus_hn 4y ago

Considering the house increases in value faster than the debt increases due to interest borrowing to buy a house has turned out to be profitable. Of course the reality is that the 30 years aren’t over and it’s all about risks, this is a gamble where the buyer was lucky.

trashtester 4y ago

> Does this mean we should have borrowed as much as possible to buy a house when rates were low ? I refinanced my morgage in spring 2020, up to the maximum allowed at the lowest interest rate bracket. The main reason was to ensure that I had liquidity, in case the economoy would crash much harder than it did in 2020, the secondary motive would be to take advantage of investment opportunities that might show up even if the credit market would crash (potentially making it hard to borrow). Until now, I've been paying about 1% over the floating interest rate, but made a good profit from the money, most of which was put into index funds, even if half the profit has been lost this year. I've moved half my index fund holdings into index funds focusing on commodities, hoping that these will hold better than generic index funds if inflation stays high. I don't belive central banks will be able to bring inflation under control on the first attempt. Instead, I predict that interest rates will go up until a moderate/strong recession causes people to enter the streets, and that QE and lower rates will follow for a time period, causing drawn-out stagflation, which is why I dont want to have too much in cash. I do have about 30% in cash, still, in case the market falls much further than it already has.

carom 4y ago

Your debt is losing value at the rate of inflation, and you are paying less than the rate of inflation for that debt. If I'm paying 2.9% on -800k and that -800k is inflated away at 8.6% then I'm making 5.7%.

chasd00 4y ago
But isn’t this assuming your pay increases at the rate of inflation? If your pay doesn’t increase then you don’t get any benefit of high inflation against your debt.
- carom 4y ago
  Or the asset you bought with that debt, as real estate has normally kept pace with inflation. Or stocks. Both might see temporary shocks though.

neffy 4y ago

Yes, if you are living in the US, and could access fixed rate mortgages. Or indeed anywhere where a fixed rate mortgage for a reasonable 5+ year term is available. Because the money supply is in some sense linked to house lending by the banks these days (not the entire source, but a lot of it), house prices will increase in tandem with the money supply, that is fairly guaranteed. For the rest, look to the latter part of the 1970´s, which is what happens in the US, when following a long period of low inflation, inflation and higher interest rates kick in to create this situation. TLDR, it isn't pretty for the lenders (banks, savings and loan, pension funds) who get stuck with the low interest rate long term loans. But that's prequelling the next financial crisis, not the current one.

cykros 4y ago

I'm not sure about borrowing as much as possible (though publicly traded companies sure did buffer their balance sheets with low cost debt). I am sure though that I won't be pre-paying my mortgage at any point, given that it's more economic to buy savings bonds, use the yield to pay the interest on the mortgage, and pocket the difference. Never mind comparing to the yield on positively performing risk assets once the markets stop seizing up (and if they don't, we all have bigger problems anyway). Taking on as much debt as possible is rarely the best idea, especially if your income could at all have been at risk at any point. But yes, with interest rates as low as they were for years, more than average was probably a pretty good idea as long as it was within one's means to support. The Fed lowers interest rates as a means of stimulating the economy, and as the old adage goes, "Don't fight the Fed."