5 ms·

I think we're seeing the culmination of a long-term trend of declining interest rates. Interest rates have been declining for 400 years, and have finally reache

I think we're seeing the culmination of a long-term trend of declining interest rates. Interest rates have been declining for 400 years, and have finally reached the point where they bottom out at 0. (or even negative interest rates, in European bank policy!). The bad part of this I think, is that valuations of long-term cash flows start becoming more and more sensitive to rates. The difference between a 2.75% mortgage and a 3.75% mortgage is bigger, relatively, than the difference between a 3.75% mortgage and a 4.75% mortgage; because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.

onlyrealcuzzo 4y ago
This exactly! If you can assume long-term stable interest rates and have access to a 30-year fixed mortgage - the difference between a 2% mortgage and a 1% mortgage is the same as the difference between a 12% mortgage and a 6% mortgage. Every percentage points that central banks artificially reduce interests by exponentially distorts the markets. A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). On a million dollar house - you'd get paid $100k per year to live there. The effects of this policy have been a moral hazard unseen before, and if it ever has to end, we're in for wild times.
- andsoitis 4y ago
  > A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). How did you calculate that?
  - cannaceo 4y ago
    The assumption is 3% CPI inflation.
    - lotsofpulp 4y ago
      I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years. Not to mention the maintenance and renovation costs on a $1M home. Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
      - aidenn0 4y ago
        Doesn't matter what a random piece of land does; the $200k you owe on your house is $200k more money you have to do other things. If the value of that money goes down by more than 1% per year, then the person with the 0% mortgate and 1% property tax is better off using any money in pocket for literally anything other than paying down the mortgage.
        lotsofpulp 4y ago
        Yes, this would not be true: > On a million dollar house - you'd get paid $100k per year to live there.
        s1artibartfast 4y ago
        That is exactly how it works for millions of people who bought or refinanced with record low rates. If you borrow $1million at 2% interest, and inflation is 10%, you are profiting $80k/yr if you put the money in an asset that goes up in value with inflation.
      - deleted 4y ago
        [deleted]
      - s1artibartfast 4y ago
        IF you are just talking about price inflation, 3%/yr seams very reasonable. Average inflation for the last 60 years is 4.7%/yr.
  - Spartan-S63 4y ago
    I'm guessing it's offsetting the mortgage and property tax with an average inflation calculation. If money gets 3% less valuable ever year and you only pay 1% on top of the value of the home (property taxes), you're effectively paying 2% less every year on the principal, IIUC.
- medvezhenok 4y ago
  I'm not sure how you got this calculation. Suppose I'm considering a mortgage of 100K. If rates go from 1% to 2%, my payment goes from 322 to 370, an increase of ~15%. If rates go from 6% to 12%, my payment goes from 600 to 1029, an increase of ~71.5%. Massive difference in terms of affordability.
lotsofpulp 4y ago
> because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile. In the US, I think 90% of home mortgage loans are fixed rate loans, so borrowers do not have changing monthly payments. I cannot find an easy source for it, but I think I read it from an Ellie Mae report. And ARMs come in 5/7/10 year, but the longest mortgages are fixed rate at 15/20/25/30 years.
- Wohlf 4y ago
  This is true, but a decent number of people with homes move so their interest rate does change.
toomuchtodo 4y ago
https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes...
prottog 4y ago
> Interest rates have been declining for 400 years This is surprisingly easy to explain: interest rates are a combination of the time factor of money (a dollar in hand is more useful than a dollar tomorrow) and the risk of default. Geopolitical stability and security has increased in the aggregate over the past few centuries, so it follows that interest rates have declined in aggregate. Makes you wonder what the implications are, now that we've hit zero. ;-)

onlyrealcuzzo 4y ago

This exactly! If you can assume long-term stable interest rates and have access to a 30-year fixed mortgage - the difference between a 2% mortgage and a 1% mortgage is the same as the difference between a 12% mortgage and a 6% mortgage. Every percentage points that central banks artificially reduce interests by exponentially distorts the markets. A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). On a million dollar house - you'd get paid $100k per year to live there. The effects of this policy have been a moral hazard unseen before, and if it ever has to end, we're in for wild times.

andsoitis 4y ago
> A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). How did you calculate that?
- cannaceo 4y ago
  The assumption is 3% CPI inflation.
  - lotsofpulp 4y ago
    I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years. Not to mention the maintenance and renovation costs on a $1M home. Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
    - aidenn0 4y ago
      Doesn't matter what a random piece of land does; the $200k you owe on your house is $200k more money you have to do other things. If the value of that money goes down by more than 1% per year, then the person with the 0% mortgate and 1% property tax is better off using any money in pocket for literally anything other than paying down the mortgage.
      - lotsofpulp 4y ago
        Yes, this would not be true: > On a million dollar house - you'd get paid $100k per year to live there.
        s1artibartfast 4y ago
        That is exactly how it works for millions of people who bought or refinanced with record low rates. If you borrow $1million at 2% interest, and inflation is 10%, you are profiting $80k/yr if you put the money in an asset that goes up in value with inflation.
    - deleted 4y ago
      [deleted]
    - s1artibartfast 4y ago
      IF you are just talking about price inflation, 3%/yr seams very reasonable. Average inflation for the last 60 years is 4.7%/yr.
- Spartan-S63 4y ago
  I'm guessing it's offsetting the mortgage and property tax with an average inflation calculation. If money gets 3% less valuable ever year and you only pay 1% on top of the value of the home (property taxes), you're effectively paying 2% less every year on the principal, IIUC.
medvezhenok 4y ago
I'm not sure how you got this calculation. Suppose I'm considering a mortgage of 100K. If rates go from 1% to 2%, my payment goes from 322 to 370, an increase of ~15%. If rates go from 6% to 12%, my payment goes from 600 to 1029, an increase of ~71.5%. Massive difference in terms of affordability.

lotsofpulp 4y ago

> because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile. In the US, I think 90% of home mortgage loans are fixed rate loans, so borrowers do not have changing monthly payments. I cannot find an easy source for it, but I think I read it from an Ellie Mae report. And ARMs come in 5/7/10 year, but the longest mortgages are fixed rate at 15/20/25/30 years.

Wohlf 4y ago
This is true, but a decent number of people with homes move so their interest rate does change.

toomuchtodo 4y ago

https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes...

prottog 4y ago

> Interest rates have been declining for 400 years This is surprisingly easy to explain: interest rates are a combination of the time factor of money (a dollar in hand is more useful than a dollar tomorrow) and the risk of default. Geopolitical stability and security has increased in the aggregate over the past few centuries, so it follows that interest rates have declined in aggregate. Makes you wonder what the implications are, now that we've hit zero. ;-)