7 ms·

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

by easytiger 4y ago

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.)

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.)