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Here is my uninformed, emotionally loaded take: so the mortgage industry not only makes houses unaffordable to so many people, but also is about to bring down t

Here is my uninformed, emotionally loaded take: so the mortgage industry not only makes houses unaffordable to so many people, but also is about to bring down the financial system with it, again?

easytiger 4y ago
How does the mortgage industry "makes houses unaffordable to so many people". It literally does the opposite.
- throwaway1777 4y ago
  Houses would be a LOT cheaper if people couldn’t take on mortgages, especially not 30 year ones.
  - slavboj 4y ago
    And yet you would discover that most people couldn't assemble the necessary funds at once, certainly not near the beginning of their careers.
    - admissionsguy 4y ago
      Nor can they save for the downpayments, which are not far from where the prices used to be before the explosion that I attribute to cheap loans.
      - bagacrap 4y ago
        If no one can afford even a down payment it's because supply is too low. It's not like there are tons of empty houses that mortgages are preventing buyers from acquiring. Also first time home buyers qualify for very low down payments, like 5%, fwiw.
        CuriouslyC 4y ago
        Supply isn't too low, supply has being diverted to investors who often don't reside in the home, or who short term rent it. If there was a big tax on non-owner-occupied single family homes that made it unprofitable to buy and hold or vacation rent, housing prices for single family homes would drop hard.
        easytiger 4y ago
        > housing prices for single family homes would drop hard. No, they wouldn't. as evidenced anywhere this is tried
        CuriouslyC 4y ago
        I'm going to need you to back that up with a fair amount of data, because this seems like an easy place for someone with an agenda to strawman.
      - yucky 4y ago
        First time homebuyers can get a FHA mortgage for 3% down. I think most people thinking about buying a house could put together $7,500 on a quarter million dollar home. And if you're looking to spend more than a quarter million on your first home, well then maybe that's the issue. Starter homes exist in all but a handful of cities.
    - hedora 4y ago
      Low interest rates make it harder to pay cash. So, the mortgage industry has been in this weird loop where you have to use it, even if you could have afforded a house without it. In two extremes: Imagine a market with 20% interest rates. You could just save money instead of holding the loan for 5 years, and then pay cash. Fewer people would have mortgages. Imagine 0.1% fixed, interest-only loans. Financing a house with that would cost about 1/200th as much as in the 20% environment, so prices would increase by something like 200x. We are coming out of ~2% rates. That means houses should cost a bit under 10x more than they would at 20%. If you put 20% down, you could probably have purchased outright in the other environment. (This ignores the possibility of new construction, since I live in California, and that’s more realistic than saying people will be allowed to build housing to take advantage of low mortgage rate arbitrage).
      - s1artibartfast 4y ago
        What does inflation look like in your hypothetical with 20% interest? Do house prices not inflate?
        hedora 4y ago
        Higher interest rates (for subsidized loans) should lead to lower inflation, since it is analogous to the government printing less money. Edit: Think of the 0.1% case from a home builders perspective. They build a house for $500K (say), so a rational homebuilder wouldn’t pay more than about that to buy a house for themselves (in the absence of market distortions). However, the buyer could take their $500K, and put it into investments that yield a few percent a year. Say they are conservative, and assume a minimum 1% annual yield. Now, they can pay the builder $4,999,999 for the house, giving the builder ~$4.5M of disposable income. The builder then spends the money, driving up prices for everyone else. (Of course, they would be wise if they used some of the money to build 5 or 6 more houses, since that leads to exponential income growth for them over time.)
      - jjeaff 4y ago
        Instead of a 5 year loan you just save up to buy a house? I suppose this is just a hypothetical? Because even when interest rates were high, people were not generally buying their homes in cash. That's like saying instead of renting for years you could just save that rent money and buy a house after a few years. And with low rates, no one was buying a house with just a 5 year mortgage either. The only reason you are seeing a lot of cash buyers right now is that you have lots of people who have sold their homes at inflated prices after buying years ago at near nothing and now that prices are falling, they have the cash to buy. But that won't last and it will soon be back to only the small group of people with very big incomes or family money and investment firms that are buying in cash.
  - deleted 4y ago
    [deleted]
  - easytiger 4y ago
    There would also be very few houses. Or do you think economies of building become infinitely cheaper when all demand is removed?
  - WJW 4y ago
    Let's say cheap debt isn't available and house prices drop to 30% of their current value. According to the first google result I find, average house price in the US is slightly over 400k, so 30% of that would be 120k. How many people do you reckon have 120k in savings available? I'm willing to bet it would be a lot less than the amount of people that can currently get a mortgage.
    - cudgy 4y ago
      Owner financing
      - WJW 4y ago
        Borrowing money to buy a house is still getting a mortgage, whether you borrow the money from a bank or from the previous owner of the house.
        cudgy 4y ago
        You said “How many people do you reckon have 120k in savings available?” to pay cash for houses with no financing available within a thread regarding the collapse of the banking mortgage industry. Owner financing is a very different instrument from a traditional mortgage. Most importantly, the terms are completely negotiable, meaning that buyers can obtain low interest owner financing even when general interest rates are high, especially when owners are desperate to sell. Owner finance instruments can also be obtained by less qualified borrowers, are not backed by government agencies, servicing costs are negligible, and many do not report to credit bureaus, which has significant implications to borrowers.
        WJW 4y ago
        Owner financing rates may be lower than general interest rates, and can be when the seller is family of the buyer or is otherwise related. That will not generally be the case if owner financing becomes the norm though, why would anyone charge lower rates than general rates to some random stranger, especially if it is a borrower who is "less qualified"??? Let's not forget that the previous owner now has to rely on this "less qualified" borrower to honor their commitment for (potentially) several decades. Large financial institutions can amortize this risk over many loans and can afford to have entire departments to assess and manage the risk. Individuals would not be able to do so nearly as well. If anything, the 2008 financial crisis should have taught us that lending more money to people than they can responsibly bear is not a wise idea, neither for the lenders but also not for the borrowers.
- jyu 4y ago
  It's more a supply / demand issue than anything to do with mortgages. When an essential good's (housing) demand outstrips supply, all surplus goes to $0 to reach the clearing price for that supply. Ex: In SF there were a lot of good big tech jobs paying $200k-$1m / yr. A vast majority of those wage increases accrued into the hands of landlords. Mortgages allow buyers to borrow against projected future earnings, allowing each buyer an affordable price compared to one who doesn't mortgage, but when everyone does it the benefits get nullified.
  - s1artibartfast 4y ago
    The benefits aren't nullified. As a result you have more homeowners and fewer people paying rent. This is the desired outcome.
  - treis 4y ago
    But that's because SF broke their real estate market. In a more functional one the cheap money flows to builders as well and they then build more houses bringing prices down.
- ismokedoinks 4y ago
  While offering mortgages might (like a traditional bank), the "mortgage-debt industry" profits from transacting on debt (the subprime mortgage crisis was a better example of this, and while the industry was bailed out the homeowners were not) which ties in with increasing housing costs (for instance, allegations about certain companies buying up housing stock and overpaying strategically to increase valuations) and foments disparities in housing.
- avidphantasm 4y ago
  Why do we need the mortgage industry, which charges a premium over the prime interest rate? Why can’t the Fed lend directly to borrowers? Why do we need intermediaries in the provision of mortgages?
  - ameister14 4y ago
    Because the Fed is not equipped to evaluate risk on that scale.
    - deleted 4y ago
      [deleted]
  - dragonwriter 4y ago
    Mortgages have higher risk and servicing costs than the lending done at prime, so they are going to be done at a premium to it no matter who does it (unless it is yet another government subsidy to homebuyers at the expense of renters.)
robertlagrant 4y ago
Constrained supply and DINKY households are the two big factors that have driven up house prices in recent decades. Not mortgages in general.
- cudgy 4y ago
  Help me here, but this makes no sense. DINK households have no children and therefore need less housing and have more flexibility when choosing housing. Perhaps it might impact trendy cities like San Francisco where DINK is not by choice (hence more DINKs) since it costs too much to have kids in a non-kid friendly community.
  - robertlagrant 4y ago
    We have a much greater proportion of couples where both members work than before. This means higher bids, and higher prices. The people that did well out of this were the people who already owned property; they've had a lovely transfer of money from those workers.
    - cudgy 4y ago
      I still fail to see a clear causal relationship between increased dual income with no kid couples and increased housing prices. The assumption I guess is that having more money from dual income implies that buyers will pay more, but there are several flaws with this: 1. Many modern couples actually have less income available for savings and housing despite having two earners say compared to single earning couples in the 50’s and 60’s when gas station attendants could afford to buy a home for a wife and several kids 2. Extremely low Interest rates have caused a much higher impact on available funds to buy homes than increases in available funds for housing from wages 3. No kid couples require smaller, cheaper houses without regard to school districts, family friendly environments, etc.
onlyrealcuzzo 4y ago
Central banks make interest rates artificially low which makes asset prices (houses) artificially high. The mortgage industry isn't really to blame for high prices.
- ethanbond 4y ago
  Is there a “natural” interest rate that currency would have w/o central bank intervention?
  - olalonde 4y ago
    Yes, loans predate central banks by a long shot. They were prevalent in ancient Rome and interest rates were determined by the market based on risk, supply and demand, etc.
    - ethanbond 4y ago
      Interest rates from lenders are still based on risk/supply/demand etc. The question is more, how do you introduce money to the money supply (which you must do if for no other reason than physical wear/destruction of currency) without a central issuer who sets an interest rate on that issuance?
      - somewhereoutth 4y ago
        Banks create money out of thin air when they originate loans. Various regulations and central bank activities are designed to control this process, but they are somewhat indirect - they don't tell a bank 'this is exactly how much money you are allowed to create', instead they enforce things like capital ratios and provide liquidity in various ways, and the money creation is then carried out by the bank rather organically.
        ethanbond 4y ago
        And can’t they currently set whatever rate they want for that still?
resuresu 4y ago
Yes. Housing is a human need just like breathing air or eating food so if you can create artificial scarcity there you create value out of nothing. The average home cost around $50k in materials to construct, but after it’s assembled it magically worth 250k? Lol the math doesn’t make sense.
- s1artibartfast 4y ago
  Try to build your house for 50K and you will see where the extra cost come from. Land and labor
  - olyjohn 4y ago
    You can barely get a framed in tiny home (no sheetrock, insulation, electrical, plumbing) for that price. And that doesn't even include land.
- jaywalk 4y ago
  Land and labor are not free.
  - resuresu 4y ago
    Land is actually valuable because its scarce. And as for building costs I highly doubt it cost 100k for the labor.
    - jmoak3 4y ago
      These days even pouring a driveway can cost in the tens of thousands of dollars. Constructing a house is rather expensive, here’s just a random link from google: https://www.ramseysolutions.com/real-estate/how-much-does-it-cost-to-build-a-house https://www.ramseysolutions.com/real-estate/how-much-does-it... Another random link claims 30-50% of the cost is labor: https://www.bankrate.com/real-estate/cost-to-build-house/ https://www.bankrate.com/real-estate/cost-to-build-house/
- osigurdson 4y ago
bradleyjg 4y ago
The mortgage “industry” post 2008 largely consists of companies that act as sales or servicers for the federal government. If you are unhappy with the general shape of residential lending in the US blame falls squarely on the federal government. Not just as regulators but as far far away the largest direct participant.
- richjdsmith 4y ago
  There’s a great book on this subject. Lords of East Money by Christopher Leonard
tomcar288 4y ago
housing doesn't need to be unaffordable. 200 years ago people paid of their houses in 10 years or less! this issue isn't mortgages. the issue is houses are way too big and land is too costly and regulation drives up the cost to build, oh and property taxes of course. address those 3-4 issues and everyone can afford housing with ease.

Here is my uninformed, emotionally loaded take: so the mortgage industry not only makes houses unaffordable to so many people, but also is about to bring down the financial system with it, again?

easytiger 4y ago

How does the mortgage industry "makes houses unaffordable to so many people". It literally does the opposite.

throwaway1777 4y ago
Houses would be a LOT cheaper if people couldn’t take on mortgages, especially not 30 year ones.
- slavboj 4y ago
  And yet you would discover that most people couldn't assemble the necessary funds at once, certainly not near the beginning of their careers.
  - admissionsguy 4y ago
    Nor can they save for the downpayments, which are not far from where the prices used to be before the explosion that I attribute to cheap loans.
    - bagacrap 4y ago
      If no one can afford even a down payment it's because supply is too low. It's not like there are tons of empty houses that mortgages are preventing buyers from acquiring. Also first time home buyers qualify for very low down payments, like 5%, fwiw.
      - CuriouslyC 4y ago
        Supply isn't too low, supply has being diverted to investors who often don't reside in the home, or who short term rent it. If there was a big tax on non-owner-occupied single family homes that made it unprofitable to buy and hold or vacation rent, housing prices for single family homes would drop hard.
        easytiger 4y ago
        > housing prices for single family homes would drop hard. No, they wouldn't. as evidenced anywhere this is tried
        CuriouslyC 4y ago
        I'm going to need you to back that up with a fair amount of data, because this seems like an easy place for someone with an agenda to strawman.
    - yucky 4y ago
      First time homebuyers can get a FHA mortgage for 3% down. I think most people thinking about buying a house could put together $7,500 on a quarter million dollar home. And if you're looking to spend more than a quarter million on your first home, well then maybe that's the issue. Starter homes exist in all but a handful of cities.
  - hedora 4y ago
    Low interest rates make it harder to pay cash. So, the mortgage industry has been in this weird loop where you have to use it, even if you could have afforded a house without it. In two extremes: Imagine a market with 20% interest rates. You could just save money instead of holding the loan for 5 years, and then pay cash. Fewer people would have mortgages. Imagine 0.1% fixed, interest-only loans. Financing a house with that would cost about 1/200th as much as in the 20% environment, so prices would increase by something like 200x. We are coming out of ~2% rates. That means houses should cost a bit under 10x more than they would at 20%. If you put 20% down, you could probably have purchased outright in the other environment. (This ignores the possibility of new construction, since I live in California, and that’s more realistic than saying people will be allowed to build housing to take advantage of low mortgage rate arbitrage).
    - s1artibartfast 4y ago
      What does inflation look like in your hypothetical with 20% interest? Do house prices not inflate?
      - hedora 4y ago
        Higher interest rates (for subsidized loans) should lead to lower inflation, since it is analogous to the government printing less money. Edit: Think of the 0.1% case from a home builders perspective. They build a house for $500K (say), so a rational homebuilder wouldn’t pay more than about that to buy a house for themselves (in the absence of market distortions). However, the buyer could take their $500K, and put it into investments that yield a few percent a year. Say they are conservative, and assume a minimum 1% annual yield. Now, they can pay the builder $4,999,999 for the house, giving the builder ~$4.5M of disposable income. The builder then spends the money, driving up prices for everyone else. (Of course, they would be wise if they used some of the money to build 5 or 6 more houses, since that leads to exponential income growth for them over time.)
    - jjeaff 4y ago
      Instead of a 5 year loan you just save up to buy a house? I suppose this is just a hypothetical? Because even when interest rates were high, people were not generally buying their homes in cash. That's like saying instead of renting for years you could just save that rent money and buy a house after a few years. And with low rates, no one was buying a house with just a 5 year mortgage either. The only reason you are seeing a lot of cash buyers right now is that you have lots of people who have sold their homes at inflated prices after buying years ago at near nothing and now that prices are falling, they have the cash to buy. But that won't last and it will soon be back to only the small group of people with very big incomes or family money and investment firms that are buying in cash.
- deleted 4y ago
  [deleted]
- easytiger 4y ago
  There would also be very few houses. Or do you think economies of building become infinitely cheaper when all demand is removed?
- WJW 4y ago
  Let's say cheap debt isn't available and house prices drop to 30% of their current value. According to the first google result I find, average house price in the US is slightly over 400k, so 30% of that would be 120k. How many people do you reckon have 120k in savings available? I'm willing to bet it would be a lot less than the amount of people that can currently get a mortgage.
  - cudgy 4y ago
    Owner financing
    - WJW 4y ago
      Borrowing money to buy a house is still getting a mortgage, whether you borrow the money from a bank or from the previous owner of the house.
      - cudgy 4y ago
        You said “How many people do you reckon have 120k in savings available?” to pay cash for houses with no financing available within a thread regarding the collapse of the banking mortgage industry. Owner financing is a very different instrument from a traditional mortgage. Most importantly, the terms are completely negotiable, meaning that buyers can obtain low interest owner financing even when general interest rates are high, especially when owners are desperate to sell. Owner finance instruments can also be obtained by less qualified borrowers, are not backed by government agencies, servicing costs are negligible, and many do not report to credit bureaus, which has significant implications to borrowers.
        WJW 4y ago
        Owner financing rates may be lower than general interest rates, and can be when the seller is family of the buyer or is otherwise related. That will not generally be the case if owner financing becomes the norm though, why would anyone charge lower rates than general rates to some random stranger, especially if it is a borrower who is "less qualified"??? Let's not forget that the previous owner now has to rely on this "less qualified" borrower to honor their commitment for (potentially) several decades. Large financial institutions can amortize this risk over many loans and can afford to have entire departments to assess and manage the risk. Individuals would not be able to do so nearly as well. If anything, the 2008 financial crisis should have taught us that lending more money to people than they can responsibly bear is not a wise idea, neither for the lenders but also not for the borrowers.
jyu 4y ago
It's more a supply / demand issue than anything to do with mortgages. When an essential good's (housing) demand outstrips supply, all surplus goes to $0 to reach the clearing price for that supply. Ex: In SF there were a lot of good big tech jobs paying $200k-$1m / yr. A vast majority of those wage increases accrued into the hands of landlords. Mortgages allow buyers to borrow against projected future earnings, allowing each buyer an affordable price compared to one who doesn't mortgage, but when everyone does it the benefits get nullified.
- s1artibartfast 4y ago
  The benefits aren't nullified. As a result you have more homeowners and fewer people paying rent. This is the desired outcome.
- treis 4y ago
  But that's because SF broke their real estate market. In a more functional one the cheap money flows to builders as well and they then build more houses bringing prices down.
ismokedoinks 4y ago
While offering mortgages might (like a traditional bank), the "mortgage-debt industry" profits from transacting on debt (the subprime mortgage crisis was a better example of this, and while the industry was bailed out the homeowners were not) which ties in with increasing housing costs (for instance, allegations about certain companies buying up housing stock and overpaying strategically to increase valuations) and foments disparities in housing.
avidphantasm 4y ago
Why do we need the mortgage industry, which charges a premium over the prime interest rate? Why can’t the Fed lend directly to borrowers? Why do we need intermediaries in the provision of mortgages?
- ameister14 4y ago
  Because the Fed is not equipped to evaluate risk on that scale.
  - deleted 4y ago
    [deleted]
- dragonwriter 4y ago
  Mortgages have higher risk and servicing costs than the lending done at prime, so they are going to be done at a premium to it no matter who does it (unless it is yet another government subsidy to homebuyers at the expense of renters.)

robertlagrant 4y ago

Constrained supply and DINKY households are the two big factors that have driven up house prices in recent decades. Not mortgages in general.

cudgy 4y ago
Help me here, but this makes no sense. DINK households have no children and therefore need less housing and have more flexibility when choosing housing. Perhaps it might impact trendy cities like San Francisco where DINK is not by choice (hence more DINKs) since it costs too much to have kids in a non-kid friendly community.
- robertlagrant 4y ago
  We have a much greater proportion of couples where both members work than before. This means higher bids, and higher prices. The people that did well out of this were the people who already owned property; they've had a lovely transfer of money from those workers.
  - cudgy 4y ago
    I still fail to see a clear causal relationship between increased dual income with no kid couples and increased housing prices. The assumption I guess is that having more money from dual income implies that buyers will pay more, but there are several flaws with this: 1. Many modern couples actually have less income available for savings and housing despite having two earners say compared to single earning couples in the 50’s and 60’s when gas station attendants could afford to buy a home for a wife and several kids 2. Extremely low Interest rates have caused a much higher impact on available funds to buy homes than increases in available funds for housing from wages 3. No kid couples require smaller, cheaper houses without regard to school districts, family friendly environments, etc.

onlyrealcuzzo 4y ago

Central banks make interest rates artificially low which makes asset prices (houses) artificially high. The mortgage industry isn't really to blame for high prices.

ethanbond 4y ago
Is there a “natural” interest rate that currency would have w/o central bank intervention?
- olalonde 4y ago
  Yes, loans predate central banks by a long shot. They were prevalent in ancient Rome and interest rates were determined by the market based on risk, supply and demand, etc.
  - ethanbond 4y ago
    Interest rates from lenders are still based on risk/supply/demand etc. The question is more, how do you introduce money to the money supply (which you must do if for no other reason than physical wear/destruction of currency) without a central issuer who sets an interest rate on that issuance?
    - somewhereoutth 4y ago
      Banks create money out of thin air when they originate loans. Various regulations and central bank activities are designed to control this process, but they are somewhat indirect - they don't tell a bank 'this is exactly how much money you are allowed to create', instead they enforce things like capital ratios and provide liquidity in various ways, and the money creation is then carried out by the bank rather organically.
      - ethanbond 4y ago
        And can’t they currently set whatever rate they want for that still?

resuresu 4y ago

Yes. Housing is a human need just like breathing air or eating food so if you can create artificial scarcity there you create value out of nothing. The average home cost around $50k in materials to construct, but after it’s assembled it magically worth 250k? Lol the math doesn’t make sense.

s1artibartfast 4y ago
Try to build your house for 50K and you will see where the extra cost come from. Land and labor
- olyjohn 4y ago
  You can barely get a framed in tiny home (no sheetrock, insulation, electrical, plumbing) for that price. And that doesn't even include land.
jaywalk 4y ago
Land and labor are not free.
- resuresu 4y ago
  Land is actually valuable because its scarce. And as for building costs I highly doubt it cost 100k for the labor.
  - jmoak3 4y ago
    These days even pouring a driveway can cost in the tens of thousands of dollars. Constructing a house is rather expensive, here’s just a random link from google: https://www.ramseysolutions.com/real-estate/how-much-does-it-cost-to-build-a-house https://www.ramseysolutions.com/real-estate/how-much-does-it... Another random link claims 30-50% of the cost is labor: https://www.bankrate.com/real-estate/cost-to-build-house/ https://www.bankrate.com/real-estate/cost-to-build-house/
osigurdson 4y ago

bradleyjg 4y ago

The mortgage “industry” post 2008 largely consists of companies that act as sales or servicers for the federal government. If you are unhappy with the general shape of residential lending in the US blame falls squarely on the federal government. Not just as regulators but as far far away the largest direct participant.

richjdsmith 4y ago
There’s a great book on this subject. Lords of East Money by Christopher Leonard

tomcar288 4y ago

housing doesn't need to be unaffordable. 200 years ago people paid of their houses in 10 years or less! this issue isn't mortgages. the issue is houses are way too big and land is too costly and regulation drives up the cost to build, oh and property taxes of course. address those 3-4 issues and everyone can afford housing with ease.