5 ms·

Worth noting that this way of thinking is true in the inverse too — when interest rates were super low, house values didn’t really go up, only credit got cheape

by zukzuk 3y ago

Worth noting that this way of thinking is true in the inverse too — when interest rates were super low, house values didn’t really go up, only credit got cheaper. In other words, the appreciation in costs is not about house value, it’s about the cost of a loan. But underneath, it really is just under-supply of homes. People are competing for limited housing, but instead of hitting a natural ceiling of affordability, they’ve continued to compete on prices by out-borrowing each other to offer ever-higher bids. We now seem to be hitting the next ceiling — buyers are unable leverage their bids any higher. I can’t wait to see what “innovations” the financial sector comes up with to create a new ceiling. I’m guessing fractional ownership or something like that.

lotsoweiners 3y ago
There is a new thing happening though as well. Existing homeowners with 3-4% mortgages are not listing their homes for sale very often anymore because they aren’t going to take 7% mortgage on the new property. This is keeping home prices pretty high. I don’t see a way for monthly mortgage payments to become affordable without this being addressed.
- bryanlarsen 3y ago
  That it is not being addressed is a ridiculously pure market failure. Let's say Jane & Joe have a mortgage at 3%, would like to move but don't have to move. The only reason they're not moving is because they're unwilling to take on a 7% mortgage. Somebody out there is holding the other end of that 3% mortgage, and would love to exchange that mortgage for one at a higher rate. If Jane & Joe could get into the same room as their mortgage holder they would quickly hash out a compromise, exchange their 3% mortgage for a 5% mortgage; the canonical win-win situation that's supposed to happen in a market. Both sides are willing to make a deal, so why can't they? But it's not happening because the bank they made the mortgage with doesn't actually hold the mortgage, it's bundled and sliced and sold on. This is a huge market opportunity, and you'd think that eventually the same forces that figured out how to slice & dice mortgages will figure out how to take advantage of this opportunity.
  - s1artibartfast 3y ago
    This reminds me of the idea of people buying their debt out of collections, and I think it has the same price discovery challenges. You say 5% is a win win compromise between 3 and 7, but how does any bank know that Jane and Joe wouldnt have paid 7. Banks don't have a good tool to screen and price discriminate between customers for this to work.
    - bryanlarsen 3y ago
      Statistics. If you have a pool of people, some of whom would not be willing to jump without a good rate and some of whom would be, you offer it to everyone and you make more money than those who don't offer the good rate. This effect is known as the "consumer surplus". People willing to pay more get the same price as those who aren't.
      - s1artibartfast 3y ago
        But is not a given it works out that way. It depends on the statistics. You could just as easily give to everyone and lose tons of money.
        bryanlarsen 3y ago
        No, they're losing money right now by not offering it. Right now they're losing money on their 3% mortgages. If it converts to 5% it turns a loss into a small profit. OTOH, if you don't offer the 5%, there are 3 scenarios: 1. the homeowner keeps the 3% and you keep losing money 2. the homeowner converts to a 7% with you and get a large profit 3. the homeowner converts to a 7% with somebody else and you make no profit. #1 and #3 are by far the most likely options, IMO.
        dmurray 3y ago
        There's a fourth scenario - the homeowner pays off the mortgage early. In the US, early payment can involve a penalty, so the homeowner buys out the loan significantly above market rate. Over the course of a mortgage, a significant number of homeowners will find they "need" to relocate for work or to join a partner or to upsize or downsize. Offering these people a big improvement on "pay a penalty rate to discharge your loan early" would cost the banks money, so they need to pitch any refinancing offer where it makes enough profit off the other homeowners to be worthwhile.
s1artibartfast 3y ago
>interest rates were super low, house values didn’t really go up, only credit got cheaper. It isn't one or the other. It is both. People don't care much what portion of their payment goes to principal vs interest. Just the final monthly cost.
- frumper 3y ago
  I feel like you’ve just refuted gp’s point about houses haven’t gotten any more expensive. People get mortgages, not buy houses. So while they are technically correct, it’s not a worthwhile distinction.
  - s1artibartfast 3y ago
    Monthly payments can go up too, but that usually has to do with other short and long term factors besides interest rate. Eg inflation, land and labor scarcity, ect

by zukzuk 3y ago

lotsoweiners 3y ago

There is a new thing happening though as well. Existing homeowners with 3-4% mortgages are not listing their homes for sale very often anymore because they aren’t going to take 7% mortgage on the new property. This is keeping home prices pretty high. I don’t see a way for monthly mortgage payments to become affordable without this being addressed.

bryanlarsen 3y ago
That it is not being addressed is a ridiculously pure market failure. Let's say Jane & Joe have a mortgage at 3%, would like to move but don't have to move. The only reason they're not moving is because they're unwilling to take on a 7% mortgage. Somebody out there is holding the other end of that 3% mortgage, and would love to exchange that mortgage for one at a higher rate. If Jane & Joe could get into the same room as their mortgage holder they would quickly hash out a compromise, exchange their 3% mortgage for a 5% mortgage; the canonical win-win situation that's supposed to happen in a market. Both sides are willing to make a deal, so why can't they? But it's not happening because the bank they made the mortgage with doesn't actually hold the mortgage, it's bundled and sliced and sold on. This is a huge market opportunity, and you'd think that eventually the same forces that figured out how to slice & dice mortgages will figure out how to take advantage of this opportunity.
- s1artibartfast 3y ago
  This reminds me of the idea of people buying their debt out of collections, and I think it has the same price discovery challenges. You say 5% is a win win compromise between 3 and 7, but how does any bank know that Jane and Joe wouldnt have paid 7. Banks don't have a good tool to screen and price discriminate between customers for this to work.
  - bryanlarsen 3y ago
    Statistics. If you have a pool of people, some of whom would not be willing to jump without a good rate and some of whom would be, you offer it to everyone and you make more money than those who don't offer the good rate. This effect is known as the "consumer surplus". People willing to pay more get the same price as those who aren't.
    - s1artibartfast 3y ago
      But is not a given it works out that way. It depends on the statistics. You could just as easily give to everyone and lose tons of money.
      - bryanlarsen 3y ago
        No, they're losing money right now by not offering it. Right now they're losing money on their 3% mortgages. If it converts to 5% it turns a loss into a small profit. OTOH, if you don't offer the 5%, there are 3 scenarios: 1. the homeowner keeps the 3% and you keep losing money 2. the homeowner converts to a 7% with you and get a large profit 3. the homeowner converts to a 7% with somebody else and you make no profit. #1 and #3 are by far the most likely options, IMO.
        dmurray 3y ago
        There's a fourth scenario - the homeowner pays off the mortgage early. In the US, early payment can involve a penalty, so the homeowner buys out the loan significantly above market rate. Over the course of a mortgage, a significant number of homeowners will find they "need" to relocate for work or to join a partner or to upsize or downsize. Offering these people a big improvement on "pay a penalty rate to discharge your loan early" would cost the banks money, so they need to pitch any refinancing offer where it makes enough profit off the other homeowners to be worthwhile.

s1artibartfast 3y ago

>interest rates were super low, house values didn’t really go up, only credit got cheaper. It isn't one or the other. It is both. People don't care much what portion of their payment goes to principal vs interest. Just the final monthly cost.

frumper 3y ago
I feel like you’ve just refuted gp’s point about houses haven’t gotten any more expensive. People get mortgages, not buy houses. So while they are technically correct, it’s not a worthwhile distinction.
- s1artibartfast 3y ago
  Monthly payments can go up too, but that usually has to do with other short and long term factors besides interest rate. Eg inflation, land and labor scarcity, ect