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That math is my favorite example of economists not living in the real world. It doesn’t account for the ability to refinance.
by Godel_unicode 4y ago
That math is my favorite example of economists not living in the real world. It doesn’t account for the ability to refinance.
- xapata 4y agoIt does, in fact. The bank prices that into the loan.
- Godel_unicode 4y agoHuh? First, the bank can’t possibly price future interest rates into the price of a fixed loan as they’re by definition unknown. Second, we’re talking about the economic model of which is better for consumers. It assumes no refinancing to lower your interest rate down the road, which is a pretty big caveat.
- xapata 4y ago> by definition unknown They're a known-unknown. Well-defined risk can be priced in. Black swans / unknown-unknowns can't.
- Godel_unicode 4y agoKnown in the sense that they know it’s possible, sure. Known in the sense that they know what the likelihood of any given rate increase is over 15-30 years (and are therefore capable of pricing it in)? No. “Priced in” has a very specific meaning, it’s not a generic term for being aware that something might happen.
- xapata 4y agoThe derivatives market for hedging interest rate risk is fairly liquid. They can add the cost of an appropriate hedge (according to their risk appetite) into the price of the loan.