I think the answer to that is that M2 growth over productivity growth predicts inflation, but globalization from the 90's to COVID muted a lot of potential inflation because buying goods and to a lesser extent services from low wage countries operates the same as productivity improvements for that purpose. Not as clear what the COVID related spike means. I think part of that is it shows up in asset inflation rather than CPI because so much of the COVID money went to people that didn't need it (as far as I can tell, how much PPP money companies got was almost inversely related to how much you were impacted, because companies that were shut down didn't benefit a ton from not shedding payroll and companies that weren't shutdown basically got to keep making close to normal revenue while getting a big chunk of their payroll covered). I think a lot of that money went into stocks, houses, boats, 2nd homes, etc., with housing being the only one of those that really shows up in CPI significantly I think, and stocks not showing up at all. That's a semi-out of the *** guess though.
OT: 2 part question
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What makes it an a bad idea? There are people that would say you choosing a 30 year over a 15 year is a terrible idea… and I would assume for the same reason you think it’s bad a idea to choose a 40 over a 30. Just cause someone pays off their home in a longer time does not make it a bad idea. You yourself admitted to a longer amortization because you felt you could earn more than the interest rate you are paying.
As a general comment to this whole thing, I’m amazed at the number of people who never pay off a house. To each his own, but I’m looking forward to getting mine paid off.
Let me rephrase this.
Its a bad idea for the government to mandate such things and back banks.
If the government backs a bank, it lowers their risk so they put out riskier loans. More money for houses drives the price up.
same as education. Rinse. Repeat.
eta: I’m not the average consumer either. I make a great living. Single. Never married. No kids.
I’ve got more than 6 months income in a savings account earning about 3% interest.
I’ve got more invested in the market.
I drove a 2012 Nissan Altima until the wheels fell off bc I didn’t NEED a new car.
we keep creating ways for people to be irresponsible. We should be making people more responsible by learning to from failures.
Exactly. Think of it this way: a 40 year mortgage taken out in 2009 vs renting, or a 40 year mortgage taken out in 2005. There are probably some people close to the former who would benefit, but there's just as likely to be a bunch of people in the latter scenario, which will cause effects that none of us should want.
As far as policy goes, I think you would need to fix cramdown and foreclosure law before allowing this, else you risk another crisis. And I don't think our current Congress is capable of that.
So you are saying you shouldn’t be able to foreclose on people who don’t pay their mortgage?
Eureka! Congratulations you've cracked the code.
As a former contractor, I'd be happy to. Just guarantee my contractual payments incrementaly every month, (with any material increases), keep the bloodsuckers at the bank off myazz about schedule, because now it can easily take 9 months to build, and if schedule is gonna be a sticking point, help me find good labor or pick up a hammer and help. Oh, and if the real estate market takes a dump or interest rates baloon while a dozen houses are getting out of the ground, my expenses get covered when all the buyers and bag men walk away and crawl back into the shadows. Good luck.
I've been left holding the bag before. "Build more houses"?? And you better damned well think before you say fund it with taxpayer money. That needs to stop. It will only drive prices higher by draining market resources even further.
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Nah man. We ain’t protecting the working man.
we protecting the dead beats who take bad loans and then don’t pay them.
Technically whether it's in a 15, 30, or 40 yr mortgage the gubment isn't backing the bank, its backing the American taxpayer. More than half of first time homebuyer's are able to buy because of gubment programs like FHA, VA, and USDA loans. Without these programs, plus Fannie and Freddie, there would be a real nightmare bifurcation of have's and have nots in the US. If banks were the only backers of mortgages you would have to have 25-30% down and 25% piti. That leaves most of the middle and lower classes out of home ownership forever.
Here is home ownership rates in the US by decade in the 20th century:
Note that the FHA was created in the late 30's and the VA loan in the 40's... When them boys got back from WW2 they were buying and building the crap out of houses thanks to the gubment backing. No gubment backing when they got back form WW1 and even though it was the roaring 20's only the upper half could get bank loans.
Back to your statement in bold, I think you are thinking of it wrong. The pricing of housing and education doesn't skyrocket because of risky loans, it goes up because of cheap money (low interest rates) making it possible to finance more with the same income. Those interest rates are set by the Fed not Fannie Mae, Freddie Mac, or Sallie Mae.
So let's piss on the Fed. well not really. The Fed has to keep interest rates at rock bottom because we can't afford the interest payments on all of our gubment debt with high interest rates.
So unless you have faith in politicians actually balancing a budget or God forbid paying down gubment debt, prepare thy rectum for lower interest rates in the not too distant future. Add in the red tape I have mentioned a lot recently that continues to add cost to building houses and manufacturing cars... and you end up with houses and cars (the two things almost everyone finances) higher than giraffe snatch because interest rates are going to stay lower than a turtle's pecker.
But the government is constantly trying to find a way so that every Tom dick and harry can buy a home.
that’s not their job. It also creates a system that isn’t sustainable.
No. But maybe banks that no longer hold the note shouldn't be able to. And maybe mortgage holders should be able to return the collateral asset and be in the clear no matter how underwater they were. Maybe they should be able to declare bankruptcy and write down the mortgage to the homes new value. It varies by state after all. In some of these states allowing 40 year mortgages would be disastrous. That's why I said Congress has to clear it up first, and I don't think they are capable.
You've spoken as if the banks and their greed played no part in the last crisis. But they ignored the law and screwed over their customers, for greed. They committed massive fraud to enable mass foreclosures, for greed. They will do it again if the law isn't clear. They have caused crises and wrecked the economy in every era that they weren't strictly regulated. It's their nature.
Milton Friedman-esque money supply/inflation arguments are the modern eras earth-centric solar system model. The reasoning is constantly changing and getting more and more convoluted to try to explain data that just doesn't align with the base theory.
The problem here is that $31T debt inflates away more than the finance payments. At 5% inflation it deflated by $1.5T but only cost $200B to finance? Yes please!
Much more likely low rates will come back to prop up crony corps. Companies with big, leveraged debt loads need low rates, not Uncle Sam. Look at BB&B. Spent $12B leveraging up by buying back it's own stock, then watched the value of that stock fall to less than $1B, and found themselves in a half a billion hole. Hello bankruptcy. If they had just refrained LAST YEAR, when everyone knew they were in deep doo doo, then they'd still be viable. But they didn't.
I'll see your 2 lines with 200 sir.**
If you think programs like FHA, VA, USDA, and whatever else are causing housing problems you are missing some information. Those programs allow blue collar workers, police officers, military members, teachers, and garbage men to own a home. I'm all for that. Lower and lower middle class homebuyers don't drive the market up. It's the upper half buying rental properties, second homes, and now ABnB's etc.
HUD is a different animal. While FHA falls under HUD, FHA is self funded by its premiums. HUD gets a big budget and spends it all on rental vouchers and public housing. I much prefer FHA that tries to lift hardworking folks out of poverty vs HUD that tries to give folks another reason to remain in poverty so they don't lose their vouchers or public housing by earning too much.
Back to helping Fannie/Freddie/FHA type stuff. I'm not sure why its not sustainable either. Do you thing that we are pumping a bunch of money into these programs? I played golf with a guy a few years ago that worked for Fannie and I found out that year and year out Fannie is one of the most profitable companies in the world. Both Fannie and Freddie are constantly ranked in the top 10 in profit per employee, well ahead of companies like Apple and Microsoft.
The failures of Fannie and Freddie in 2008 were real, but the much of the fault laid upstream with places like Countrywide writing those garbage mortgages, but they still should have had more diligence. Luckily, the new rules have eliminated almost all of that crap. When the gubment backstopped Fannie and Freddie with $192 Billion, that made the headlines. What doesn't make the headlines is that over the next 10 year Fannie and Freddie paid all of it back, plus an extra $100 Billion in 10 years... The greatest return in government spending history possibly. Since 2019 F&F are putting their profits into reserves so they can cover any losses in the future as .
I think a lot of people hear about "risky" subprime loans causing the housing bubble to burst and assume that was lower income people. And while some of it was, a lot more of it was middle and upper class speculators trying to flip houses. They were over their skis as much as anyone... And while I hate to bring race into TX an CA upper income Asians and Latinos were the absolute kings of house flipping back then...
This chart shows foreclosure rates from 2004-2009 broken down by income and race.
So even though poor folks have a lot less cushion to handle the economic shock, they were very much in line with other income brackets back then in foreclosure rates, the only thing that really jumps out income wise is those middle and high income asians and latinos... Many of which were flipping houses and speculating, but it would also be fair to assume that in the latino group there were a lot of mid-high earning contractors/trades that were laid off in 07-08 that likely were foreclosed on as well.
My favorite way to illustrate this is looking at the US foreclosure rate by county in 2008. If poor people are getting foreclosed on Mississippi should be way up the list, but its very clear that the foreclosures revolved around speculation zones.
Speaking as someone who has come from a long line of po folk. Nobody in my family has ever been foreclosed on. Poor folks are so proud to own their home, they'll start cooking meth to keep that 17er.**
The people I knew that got foreclosed on back then were yuppie dbags born on 3rd base and thought they hit a triple by flipping houses or building spec homes. So my take is I do want every Tom, Dick, and Harry (within reason, hardworking blue collar folks that don't make a lot of money for instance) to own one home. What I don't want is for every Winston, Humphrey, and Chesterton to own 10 houses financed on 2% rates with a line of credit from the other homes used for the downpayment that they in turn rent out to Tom, Dick, and Harry and keep the supply of entry level homes depressed.
No. Banks shouldn’t bail out people who don’t pay their bills.
And no the government shouldn’t bail out banks.
Its a horrible product for the vast majority of the population, but sure, why not? We allow borderline predatory lending in all these other areas all the time from private financiers (credit cards, student loans, paycheck advance / title loan places, etc.). Don’t see how this is any different.
And although I’d advise as strongly as I could against any early career homebuyer from ever getting a 40-year mortgage, they do make quite a bit of sense for those investing in rental properties and things like that. However, I don’t believe this is the true intended market, because those folks are going to still likely break even and re-fi when the time is right if they know what they are doing.
Both. For any entity to make money / profit, it has to help somebody get something they want that they either can’t get elsewhere at the same value, or at all. So of course they are “doing a service” to consumers if they are selling something that people are actually buying. And of course it would be pointless for them as a business to sell the product for the same or less than it costs them in terms of money, resources, and risk. So they are of course greedy in that they are charging more than it takes to break even, because the sole purpose of whatever they sell is to improve their own bottom line.
Any successful business venture, whether its a garage sale or running a Fortune 500 company, involves both greed and doing a service. The goal isn’t to not be greedy, its just to not be any more greedy than the competition.
The short version is you took an L.
I agree with you that ultimately more financing options drives up prices. Although I don’t think it’s cause of bad loans but rather making loans available to more people. Like you mentioned, student loans being so available made tuition sky rocket, being able to finance a truck for 8 years suddenly made trucks cost $80k. And I agree with your overall premise that it’s probably not the most responsible thing to get a 40 year mortgage.
I just don’t know what the solution is. House prices have increased to the point that a 40 year mortgage is needed for people on the lower end of the income to afford a home. A 30 year mortgage used to be unheard of as well, prior to WW2. More home ownership has generally been a good thing for the United States. People need a place to live. That can be done one of 2 ways… provide mortgages people can afford or allow corporations and landlords to own the majority of property and people become lifetime renters.
Well, in an ideal world. But here in the one I live in (can't speak for you), we gotta pick one.
I am curious as to why you feel this way.
Early career homebuyer's struggle with affordability mainly because of how punitive it is to have to rent and try to save money for a downpayment. That rent goes up every year as does the cost of the house and the size of the downpayment. At least by locking in a mortgage they are effectively locking in a rent payment and no longer chasing a usually appreciating housing market.
And yes, if the **** hits the fan and your forced to sell in the first few years, you have no equity. But its the same case with a 30 year mortgage. In fact on a $320,000 mortgage at 6.4% rate after 10 years on a 30 year loan you still owe $299,500. On a 40 year at the same rate after 10 years you owe $309,800. It's effectively $1,000 per year of extra equity for the first 10 years.
The nice thing about being early career is most people get significant income growth in their 20's and 30's before hitting the dreaded middle management wall in their 40's. This allows them the opportunity to refi into a lower term loan and or make additional principal payments for a few years and then when the time is right move up into a bigger home with that equity.
40 year mortgages are not the enemy, unless like you mentioned we give them to the real estate investor to buy up even more starter homes. The enemy of the first time homebuyer is the exotic loans like ARM's. This is where all the trouble came from last time and luckily we aren't there today, but I have a feeling its coming... This chart should 100% explain what caused the housing bubble. The 40 year mortgage is by far the lesser of 2 evils.
You know that without government involvement, your 30 year fixed rate mortgage would not be available? Without government buying mortgages, You’d be lucky to have a fixed rate for 3-5 years. You may get a 10 year term (although unlikely) but it would be a floating a rate or at the very least a rate that repriced every few years.
You’d have to qualify for a mortgage every time the loan ballooned. Which even if your income and credit score remain stable, you can’t really control the value of your property. Imagine having your mortgage mature in 2009. Even if you’re fine from an income perspective, most likely your property value dropped. If the bank requires an 80% LTV and a new appraisal comes back at 90% LTV, you’re coming out of pocket or facing a non renewal of your mortgage.
I can tell by your posting that you don’t think you benefit from government assistance on your mortgage but you definitely do, we all do.
I think amount underwater is the driver. ARMs are more likely to be underwater than 30 yrs. But 40 yrs will give them a run for their money.
Hot take: houses are no less affordable. Houses in, as glfr put it, non sh!tty areas are. There’s no housing shortage. There’s a non-sh!tty area shortage.
^^^This. As bubbly as our housing market seems, its so stable. The rest of the world lives of variable rate mortgages. We tried it one time with all the ARMS in 2003-2006 and it blew up our housing market. Two pictures to explain how volatile it is in Canada right now because of adjustable rate mortgates.
The Canadian Benchmark housing price is down 16% yoy. They have basically had the same value crash we did from 07-10 in a year. We do not want that kind of volatility.
All of your points are valid, but I mainly feel that way because of how human nature works. And because I’ve been there in those shoes, too. For a great many first time home buyers, the predicament is not “I want to buy, but how can I afford this house with a 30 year mortgage at current rates?” It’s more like “I’m 100% buying a house, with a 30-year I can only get this small place in the semi-questionable school district, but with a 40-year I can get this way nicer place!” Not many consumer groups out there with more emotion and sentiment driving their decisions in place of logic than first time home buyers.
And the worst thing is that they often think because this very official person at the bank told them they qualified for X amount, that means they can afford it. I closed on my first mortgage in 2011, at absolute rock bottom of the housing market, and right after all the much stricter lending regulations were implemented. The financed amount on my loan was $162,000, which at that time I was at least a small bit nervous about because I, too, stretched a little beyond my planned budget and loan duration in order to get the home I wanted….got the 30 year instead of the 15 year I told myself I was going to get, etc. It wasn’t a terrible stretch, but it certainly caused me to delay some large purchases and cut some short term expenditures to make sure I got off on the right foot. As I was signing the final loan paperwork, I asked the B of A lending agent, “Just out of curiosity, what is the max amount I would have qualified for?”. She said, “Well let’s see….based on your current assets and income, you’d qualify for a 30-year at the same rate for $378,000.”
My jaw nearly hit the floor. This is literally on the heels of the greatest financial crisis of our time caused by reprehensible lending practices, and a time where nobody even wanted to admit in public that they were a lending agent for a big bank. New regulations and oversight abound, and they still would have written me a mortgage that day that I would have, no doubt, 100% foreclosed on within 4 months….if I had asked for it.
And that’s the main reason why I’d say its a bad idea. The biggest theoretical beneficiaries are also going to be the ones with the least self-control as far as how much they stretch to get into that house that’s just a little bit nicer. And there never has been a check in the system on those types of behavior. The rental property investor types that are flush with cash won’t have this problem, they’ll be more calculated and jump at the opportunity based on nothing more than the bottom line.
To turn this argument around, you’re also paying less than $150 more per month for that 30-year. And with that you are assuming considerably less risk in the event of a market downturn. And I’d also question if your example considers how much longer you’d have to pay PMI in the case of the 40-year, assuming lets call it a 5-10% down payment. Because to your first point, that’s really what this is about. These early career home buyers are not going to be meeting the 20% LTV threshold. And when you add up the longer PMI, higher property taxes/insurance/repairs on the nicer house, larger interest payments, closing costs, those first several years on the 40-year note, and subtract the much smaller amount of accumulated principal….its possible to find yourself much better off just getting a more modest house with the 30-year. Especially when buying right now when it seems to be still near the short term ceiling in the housing market.
This is certainly true. But they can still re-fi from the 30-year as well, and not have to worry nearly as much about the market tanking before rates drop enough to make the re fi make sense.
Agreed. And I’m not calling the 40-year note the enemy. As I said, banks should be allowed to issue them. But I still feel its a product that will be a poor financial decision for far more people than it truly helps….from an opportunity cost perspective. Its another risky financial pitfall that people will jump in with both feet.
Which pretty clearly says the homes are overvalued because of the borrowing terms available.
You clearly track this stuff much more closely than I ever have, but I am curious about the above statement. I mean, sure, a smart investor might’ve found ways to outpace the housing market, but does this chart not indicate that home ownership has been a pretty smart, safe investment over last 60 years?
Avg annual growth of just under 6% isn’t terrible, right?
My home has appreciated faster than that. Factoring in improvements and maintenance, though, I suspect I’m losing money.
By itself it isn’t, but that’s just on the value of the home. You deduct the property taxes, mortgage interest, insurance premiums, mortgage insurance (if applicable), repairs / maintenance (guaranteed to be applicable, but most people don’t factor it into planning nearly as heavily as they should), closing costs of the loan and of any refinance of the loan, and cost of improvements / customizations….it brings that 6% down considerably. Probably cuts it in half at best, which just puts the return as being equal or not much greater than the average annual inflation over the past few years. And that’s also not considering keeping a larger liquid savings, at a lower return than most any real investment, for purposes of handling home emergencies…..for the people who wisely choose to do that.
At 3%, obviously that’s still better than the 0% return of renting when only considering those two options in a vacuum, but if you put all that theoretical money paid into the market and tax advantaged accounts instead of a mortgage (minus whatever your rent payment is), you can likely pull 8-10% easily over the long haul, and that’s without any of the headaches and stress that come with home ownership. Forced savings isn’t the worst thing in the world. But as PooSocks said, its not really an investment unless you are an all-cash buyer or someone who is buying the property for purposes of passive income by renting it. And even in those cases, you can likely find a better alternative with more return if you look hard enough.
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I don’t think any honest person who was paying attention would ever claim its poor people that are being exploited. Even in much more affordable times, you had to be a hell of a long way from poor to qualify for a mortgage, even a bad one. Taking advantage of the lower middle class would be a more accurate description.
You're probably right, nobody but poor ol' cost-plus-10% contractors take any risk in the homebuilding ecosystem.
Edit: and as others have patiently explained above, almost all houses are "taxpayer funded".
My point is your home you live in is not an investment. It's not liquid. If you sell it you are homeless until you rent or buy something else. Then the actual return is really poor relative to equities.
And as good as that chart seems, housing is barely above inflation long term. If you put $100 into American housing in Q4 1975 it would today be worth $988. If you had put that $100 into the S&P on the same day and reinvested the dividends it would currently be worth $21,287. If you factor the leverage of a 20% down mortgage that $988 goes up to $4940, but still less than 1/4 the return of the market.
With that said, as @turkish mentioned once you add in upkeep, you really are unlikely to break even over the long term. Every 30 years after a home is built it will basically be rebuilt. Some of it because stuff breaks, others because it goes out of style. 2-3 water heaters, a roof, foundation repair, two kitchen remodels, a plumbing leak. New windows and doors. New floors. 2 new HVAC systems. I never have to replace the water heater in the old JPM stock.
So instead of buying a house, imagine staying a renter since 1975. If you took the down payment for that median US home back then ($40,000 home and $8,000 down payment) and invested it in the S&P without putting another dime in the S&P, you would have $1.8 million dollars today. If you bought the house you would have a $392,000 home that you probably dumped $392,000 worth of repairs and remodeling into over the nearly 50 years.
The downside is by staying a renter you probably moved 20+ times. And the reality is it takes a ridiculous level of commitment to invest rental savings and potential down payments in the market. Nobody would do it. So buying a home is not a great investment, but it's a wonderful quality of life move and the greatest piggy bank ever devised.
ETA. There's a nice cash flow savings over the long term by buying a house on a fixed mortgage in that you give your self rent control, by year 10 the renter is paying much more monthly than the buyer.
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Makes sense, thanks. And I should know about all the hidden expenses of home ownership as well as anybody. Literally yesterday, I was about to head out around lunch time, but the garage wouldn’t open more than a foot off the ground. I looked around everywhere to see what was blocking it, and long story short, I got to drop $450 on new torsion springs faster than I could snap my fingers. This kinda crap never ends
Everything the government does to subsidize home buying drives up prices, so while I benefit from a 30 year fixed mortgage, I'm also paying a bigger note than I otherwise would.
The biggest problem are the artificial restrictions on supply (which are largely state and local more, but also some federal), so prices would still be high, and it's possible people would be idiots and spend the same amount of money on a floating rate as a fixed rate (I think Canada basically does this?). But a lot of people obviously learned their lesson about adjustable rates after 2009. I think they'd probably get somewhat more conservative after seeing people get burned by adjustable rates. And if not, you'd at least have people that are conservative get the opportunity to buy homes out of foreclosure.
Owning your home is an inflation hedge. If you have low inflation or even mild deflation, you may end up "overpaying" for your house, but that's fine because you're saving on everything else. If you have high inflation, you're constantly battling to have your wages keep up, but that's a lot easier when 20 to 30% of your expenditures are locked in (provided you can keep up enough to make your house payments).
And of course for years we've had the ideal situation for home ownership, where inflation is low, rent increases are higher, and homes are appreciating, all while your payment is locked. As population growth flatlines, I guess we may see a lot of the country have the reverse situation, where rents drop and inflation in non-housing areas is moderately high and wage growth anemic, so it hurts. But it seems likely rental quality will drop pretty quickly in those situations. Places in Mississippi that are struggling still don't seem to offer a lot of bargains on decent housing, unless you buy, in which case you are getting a house well below the cost of construction but also are locking in probably below inflation returns.
So you want all the benefit without any risk. Thats a heck of a deal, if you can find it. Real estate has historically been a volatile market with a huge amount of upside...due to the inherent risk.
Why are the people who signed for bad loans(literally millions of people of varying political persuasion, race, ethnic and cultural background, and gender) considered deadbeats and not 'working men'? Many of those people were blue collar working men and women. Many were nurses. Many were mechanics. Many were teachers. Many were small business owners. Etc etc etc.
Many were even able to continue paying their mortgage, but it became a bad financial decision to do so. And why did it become a bad financial decision?...because banks chose to create and manipulate highly risky transactions(sub-prime and CDS), and government chose to allow those insane products. Oh, and whats really ironic(within the context of an issue identified in this thread) is that housing prices dropped in many areas due to an over-production of new housing which cratered value.
How is and of that the fault of 'the dead beats' as you call them? And remember, the working man are who held a lot of those bad mortgages.
This is the problem with being basic with your thinking of who is right and who is wrong with many issues- you create heroes and villains when shlt isnt nearly that black and white.
but how did we get here? Why do we think that every single person should own a house right now.
We have a problem in society today especially in America. People gripe about student loans while buying houses that are too big and too expensive and way more than they NEED. At the same time they drive around in new cars they can’t afford.
The solution is let the market fix the “problem”. Rent. Buy a smaller older home. Don’t buy in the trendy neighborhood.
If you can afford a 40 year mortgage payment, you can sacrifice a few more years and save responsibly an purchase a 30 year mortgage.
But the government is trying to fix problems that don’t exist. AND ITS ONLY TO GAIN VOTES OR DUE TO GREED.
I stopped here bc that’s literally what we are doing with individuals in most aspects today. They are risking nothing while they expect things to be given to them.
Student loan forgiveness?