The Case Against 30-Year Mortgages(wsj.com)
wsj.com
The Case Against 30-Year Mortgages
https://www.wsj.com/opinion/the-case-against-30-year-mortgages-0cbd6d56
55 comments
> Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
That still can be pretty bad in the US if you are not in a nonrecourse state [1]. If the amount the house sells for in foreclosure is not enough to pay off the mortgage the lender can come after you for the difference. Chapter 7 will protect some of your stuff, but you still could lose a lot of money from your bank accounts and your non-retirement investment accounts.
It's a lot nicer in the nonrecourse states. In those states if you can't pay the mortgage the lender only gets whatever the house brings in foreclosure. They cannot come after you personally for any shortfall.
Being in a nonrecourse state makes mortgages a lot less scary. For those in such states you do have to be careful if you refinance or get a second mortgage though, because it is often only the original purchase mortgage that is required to be nonrecourse.
[1] Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, or Washington.
That still can be pretty bad in the US if you are not in a nonrecourse state [1]. If the amount the house sells for in foreclosure is not enough to pay off the mortgage the lender can come after you for the difference. Chapter 7 will protect some of your stuff, but you still could lose a lot of money from your bank accounts and your non-retirement investment accounts.
It's a lot nicer in the nonrecourse states. In those states if you can't pay the mortgage the lender only gets whatever the house brings in foreclosure. They cannot come after you personally for any shortfall.
Being in a nonrecourse state makes mortgages a lot less scary. For those in such states you do have to be careful if you refinance or get a second mortgage though, because it is often only the original purchase mortgage that is required to be nonrecourse.
[1] Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, or Washington.
>Student loans are a scam because they are not dischargeable even in bankruptcy proceedings; this distorts the true cost of student loans.
That doesn't make them a scam. These loans are highly unnatural and issued to young people with no credit history and no definite plan to ever repay. If you let people go bankrupt on them, they would max the loans out and default almost immediately.
>Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
That is the worst that can happen for a borrower IF they qualify for Chapter 7. These loan defaults are damaging to society as well. Even when the banks get the houses back, they lose at least tens of thousands on each one in the process of selling them.
That doesn't make them a scam. These loans are highly unnatural and issued to young people with no credit history and no definite plan to ever repay. If you let people go bankrupt on them, they would max the loans out and default almost immediately.
>Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
That is the worst that can happen for a borrower IF they qualify for Chapter 7. These loan defaults are damaging to society as well. Even when the banks get the houses back, they lose at least tens of thousands on each one in the process of selling them.
By all means I can imagine the 30-year fixed loan could be driving up prices of the land itself (the lots). There is of course a non-trivial cost for materials and labor, below which you would never expect see the price of a new home fall.
I suspect though, for better or worse, if we had to pay cash for a home, builders would simply be putting up inexpensive mobile-home style houses on tiny lots. Suburbia would look very different from what it looks like today.
It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
I suspect though, for better or worse, if we had to pay cash for a home, builders would simply be putting up inexpensive mobile-home style houses on tiny lots. Suburbia would look very different from what it looks like today.
It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
> It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
It’s kind of already been happening. Rising LTVs. A rising percentage of renters. All this means the wealthy own a larger share of housing. Rent and mortgage payments are two ways for those with substantial assets to parasitize cashflows from those without. The article wants to blame the pass through effect of subsidies (the way that each subsidized dollar partially cancels itself out by boosting price some amount between $0.01 and $1.00) but it ignores the elephant in the room of wealth inequality - the structural cause of housing scarcity.
It’s kind of already been happening. Rising LTVs. A rising percentage of renters. All this means the wealthy own a larger share of housing. Rent and mortgage payments are two ways for those with substantial assets to parasitize cashflows from those without. The article wants to blame the pass through effect of subsidies (the way that each subsidized dollar partially cancels itself out by boosting price some amount between $0.01 and $1.00) but it ignores the elephant in the room of wealth inequality - the structural cause of housing scarcity.
To be sure. I just don't see a simple solution to that.
American Suburbia should actually look more like the pre-automobile streetcar neighborhoods. That development style is far more sustainable, pleasant/walkable, reduces car dependency (biggest drag on individual wealth), etc.
I find that Americans want affordable homes but they also have a crazy list of demands that turns all “modest starter homes” into luxury homes by global standards.
The “must-have” checklist gets crazy. I’m not going to share a bathroom, I’m not going to share walls, I need a big yard, and I need a big garage to park my cars because I need to be far away from everyone/everything, I need a separate room for storing all the stuff I bought from Target and don’t use anymore, I won’t share walls, I won’t share outdoor space, the list goes on.
I find that Americans want affordable homes but they also have a crazy list of demands that turns all “modest starter homes” into luxury homes by global standards.
The “must-have” checklist gets crazy. I’m not going to share a bathroom, I’m not going to share walls, I need a big yard, and I need a big garage to park my cars because I need to be far away from everyone/everything, I need a separate room for storing all the stuff I bought from Target and don’t use anymore, I won’t share walls, I won’t share outdoor space, the list goes on.
The thing that sucks about the expectations is that it’s also what the market builds. I’ve been looking with what I think is a reasonable list; 1.5 bath, 3 bedrooms, ideally a living room and dining room but if they are combined or I have to eat in the kitchen I’ll survive, partly finished basement and enough yard space for a 10’x10’ garden. I’d be fine with it being a duplex. But they don’t exist! At least not in my state. Everything is either gigantic, well by my standards, or a condo.
Yeah, builders don't build starter homes any more.
>I suspect though, for better or worse, if we had to pay cash for a home, builders would simply be putting up inexpensive mobile-home style houses on tiny lots. Suburbia would look very different from what it looks like today.
There are other kinds of loans and different terms too.
>It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
The cheap credit drives up home prices. It's not actually an obvious aid to poor people. It discourages saving up for a house. Higher interest rates would drive prices down and make down payments easier to save up.
There are other kinds of loans and different terms too.
>It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
The cheap credit drives up home prices. It's not actually an obvious aid to poor people. It discourages saving up for a house. Higher interest rates would drive prices down and make down payments easier to save up.
This isn't about 30-year mortgages in the general case, this is about the US specifically, where a fixed-rate 30-year mortgage is typical, with a good rate and no early repayment penalty.
And yes it's insane, because if rates go up you leave it alone and if rates go down you remortgage at a lower rate.
And yes it's insane, because if rates go up you leave it alone and if rates go down you remortgage at a lower rate.
Why is that insane? It’s good for the consumer, no?
Not all consumers are homeowners. Something that is only good for one portion of the public is usually paid for by the other portion.
It's insane because why would you offer such a product? You're giving the customer a free bet on interest rates.
A lender never (intentionally) gives anyone anything for "free". This is why ARMs often have lower interest rates than fixed 30 year mortgages - the risk to the lender from rising interest rates is lower with ARMs so lenders generally accept a lower interest rate on ARMs.
Both sides are making a bet on future interest rates and alternative investment returns - with one (the borrower) paying extra for an "opt out early" option for which the lender assumes the risk.
It's a bit like the borrower is buying a long term put or call option from the lender which the borrower is free to exercise at any time or to let expire but the lender can't get out of (they, of course, can always sell the mortgage - but perhaps at a loss in some economic climates due to past and expected future interest rate declines and/or changes in default risk due, for example, to a recession or depression).
Both sides are making a bet on future interest rates and alternative investment returns - with one (the borrower) paying extra for an "opt out early" option for which the lender assumes the risk.
It's a bit like the borrower is buying a long term put or call option from the lender which the borrower is free to exercise at any time or to let expire but the lender can't get out of (they, of course, can always sell the mortgage - but perhaps at a loss in some economic climates due to past and expected future interest rate declines and/or changes in default risk due, for example, to a recession or depression).
Because the government is interested in subsidizing residential property ownership.
Why would healthcare be free? Who would offer such a product? Because some governments are interested in subsidizing such things.
Why would healthcare be free? Who would offer such a product? Because some governments are interested in subsidizing such things.
> the government is interested in subsidizing residential property ownership.
As an aside: that doesn't work, it just makes houses more expensive.
As an aside: that doesn't work, it just makes houses more expensive.
Plenty of places don't have 30 year mortgages, variable rates might even be standard there and real-estate is still unaffordable. Until Covid housing was actually quite cheap in the US relative to income compared to many other Western countries. It still relatively is, just compare major US and Canadian cities, the gap is huge.
Free bet? You have to pay to refinance.
Not a whole lot. Also, if you have a generous enough mortgage agent they will assume the cost of the refi. I’ve done at least 2 refi’s in the past at $0.
Thanks, I didn't know that.
At the end of the day, they make money on the interest. Supply meets demand.
that's how all bonds/loans work
It's not how bonds work because you can't pay off a bond early other than by buying it on the open market at the prevailing price.
And furthermore, not all loans are fixed-rate. UK mortgage rates are relative to the Bank of England base rate.
And furthermore, not all loans are fixed-rate. UK mortgage rates are relative to the Bank of England base rate.
>you can't pay off a bond early
Only assuming it doesn't have a call provision.
Only assuming it doesn't have a call provision.
Some variable rate mortgages in the UK are. You can also get fixed rate.
Fixed-rate mortgages are offered in the UK, but they are only fixed at a good rate for a short period of time (maybe 2-5 years) before they go up to an unreasonable rate, which would force you to renegotiate the mortgage to get the new prevailing rate at that time.
So it's effectively a variable rate anyway.
So it's effectively a variable rate anyway.
Well, a series of shorter term fixed rates. Which I guess makes it variable over the entire lifetime of the mortgage, but a bit more predictable than a true variable rate.
You can get 10 year fixes, but they are of course more expensive than shorter term fixes.
You can get 10 year fixes, but they are of course more expensive than shorter term fixes.
A tangential note - U.S. Federal Housing agency (FHFA) is currently led by William J. Pulte, who is the grandson of the founder of PulteGroup, one of the largest residential home construction company [ https://en.wikipedia.org/wiki/Bill_Pulte ].
Right for the wrong reason.
Are 30y loans bad? Yes.
Is it still ok to buy a home with a 30y loan? Yes.
However, as your career (hopefully) grows and you earn more, plus inflationary aspects of time, eventually you want to be in a spot to refinance your 30y loan into a 15y or 20y one (and hopefully before the half way point!).
I was able to refi a 30y loan about six years into it into a 15y thanks to low Covid rates, and while I only pay a few hundred more per month I went from maybe $6,000 a year in principal and $8,000 in interest to $14,000 a year in principal and $5,000 a year in interest. “Throwing away” a lot less money in interest payments is good for your net worth.
Are 30y loans bad? Yes.
Is it still ok to buy a home with a 30y loan? Yes.
However, as your career (hopefully) grows and you earn more, plus inflationary aspects of time, eventually you want to be in a spot to refinance your 30y loan into a 15y or 20y one (and hopefully before the half way point!).
I was able to refi a 30y loan about six years into it into a 15y thanks to low Covid rates, and while I only pay a few hundred more per month I went from maybe $6,000 a year in principal and $8,000 in interest to $14,000 a year in principal and $5,000 a year in interest. “Throwing away” a lot less money in interest payments is good for your net worth.
Here's the grain of salt: Canada and Australia do not have 30 year mortgages yet face similar housing woes.
That said, it seems like the article buried the lede and is really complaining about interest costs.
That said, it seems like the article buried the lede and is really complaining about interest costs.
House prices in Canada are dropping this year. Not much, and from an insanely high base, but the need to refinance at a higher interest rate has forced some people to sell.
> House prices in Canada are dropping this year.
Where exactly?
For example, I live in Montreal, the stast for August:
Single-family home median price increased by 7.3% year-over-year to $633k.
Condo median price increased by 3.7% year-over-year to $422k.
Plex median price increased by 10.1% year-over-year to $840k.
Where exactly?
For example, I live in Montreal, the stast for August:
Single-family home median price increased by 7.3% year-over-year to $633k.
Condo median price increased by 3.7% year-over-year to $422k.
Plex median price increased by 10.1% year-over-year to $840k.
https://globalnews.ca/news/11469803/canada-fall-housing-mark...
> While some major markets — Winnipeg, Regina, and Toronto — saw home resales go up from August to September, most markets remained tepid.
> Vancouver, Calgary, Edmonton, Saskatoon, Hamilton, Ottawa, Montreal and Halifax saw slight declines, “suggesting the recovery is still uneven and fragile,” RBC economist Robert Hogue said in the report.
I know that out here on the west coast my property valuation has dropped from the peak. Not much, but it’s clear from talking to realtors that you just can’t buy a house and flip it a year later anymore.
I think that depending on how you slice the data,
> While some major markets — Winnipeg, Regina, and Toronto — saw home resales go up from August to September, most markets remained tepid.
> Vancouver, Calgary, Edmonton, Saskatoon, Hamilton, Ottawa, Montreal and Halifax saw slight declines, “suggesting the recovery is still uneven and fragile,” RBC economist Robert Hogue said in the report.
I know that out here on the west coast my property valuation has dropped from the peak. Not much, but it’s clear from talking to realtors that you just can’t buy a house and flip it a year later anymore.
I think that depending on how you slice the data,
Toronto, mainly. Other places may be down but not enough to notice.
Quebec plays by its own set of rules.
Quebec plays by its own set of rules.
The condo market is hurting the most. Which is exactly what people have been asking for - lower prices - achieved by vacancy tax, foreign buyer ban, speculator tax, and no rights for landlords.
> The condo market is hurting the most.
Are you talking about specific areas of Toronto?
Condo prices in Montreal are growing at about inflation rate.
Are you talking about specific areas of Toronto?
Condo prices in Montreal are growing at about inflation rate.
Canada does have 30 year mortgages
They're amortized over 30 years, but the term is a maximum of 10 years, more commonly 5. After the term is up the next term will have a different interest rate.
The title is misleading. You need to read the whole article to understand what the author actually criticizes: the subsidies. As one of the commenters to the original article noted, this point is not to solid when you look at European markets with no subsidized mortgages where you have to pay floating rate instead of fixed one or the fixed one is for much shorter periods.
A very strange article TBH. A lot of truisms and emotional statements with the lede buried and no spelled out solution. I mean, we can all agree that working one's whole life just to have a place to live is crazy, but it's not what the article is really about, despite repeating this thing a few times.
A very strange article TBH. A lot of truisms and emotional statements with the lede buried and no spelled out solution. I mean, we can all agree that working one's whole life just to have a place to live is crazy, but it's not what the article is really about, despite repeating this thing a few times.
No surprise this is written by a conservative think tank guy with a focus on an economic policy agenda. Stay tuned for "actually, the NLRA is bad for workers" and "really everybody should have the right to work at a business that doesn't meet OSHA requirements" and "your 401k depends on stock prices, so don't you dare raise the corporate tax rate."
I very sorry that banks lose out when somebody gets a fixed rate mortgage and then rates rise. "If only everybody had adjustable rate mortgages" doesn't seem like a win to me.
I very sorry that banks lose out when somebody gets a fixed rate mortgage and then rates rise. "If only everybody had adjustable rate mortgages" doesn't seem like a win to me.
Fixed rate mortgages create a problem for central banks trying to control inflation. Raising interest rates has an outsized impact on a small number of people rather than spreading the pain across all mortgagees.
Isn't the alternative less home ownership and less growth in quality of life? Didn't all of those programs increase demand which made people homeowners?
There are a number of reasons why homes are expensive today and it's not just "social programs bad".
There are a number of reasons why homes are expensive today and it's not just "social programs bad".
I grew up in a 1200 sq ft house with 3 br, one bath and a 1-car garage. Built in 1940. Typical small home for a middle class ish family (us). Now, they’d want a 2200+ sq ft home with 3+ baths, a 2-car garage and parking pad. And people are surprised when much more house costs much more money. Not factoring in the entry of private equity for airbnb or rental. Same amount of land as the lot sized for the older homes were good. Kids had to play somewhere.
When people go on about the need for affordable housing, they’re not asking for the 1940 model described above nor for 200 sq ft urban rabbit warrens. They want the big house/good lot house with a good commute for little money. And probably a pony.
When people go on about the need for affordable housing, they’re not asking for the 1940 model described above nor for 200 sq ft urban rabbit warrens. They want the big house/good lot house with a good commute for little money. And probably a pony.
> When people go on about the need for affordable housing, they’re not asking for the 1940 model described above nor for 200 sq ft urban rabbit warrens. They want the big house/good lot house with a good commute for little money. And probably a pony.
You must not live in an HCOL area. In my city, a 1000sf 100 year old house, no garage, small lot, is going to run you at least 800k. I would be perfectly happy in one of those houses, but not at that price point.
You must not live in an HCOL area. In my city, a 1000sf 100 year old house, no garage, small lot, is going to run you at least 800k. I would be perfectly happy in one of those houses, but not at that price point.
That’s my point. People want affordable. The market tends to deliver (blindingly) expensive. It might not be possible to build something affordable in popular areas - there is a minimum cost of construction. This is somewhat constant methinks. There is a cost of land, which is staggeringly variable. And there is the friction of the whole process which is also quite variable.
If people really want cheaper housing, they need to provide remote work or well distributed satellite employment
If people really want cheaper housing, they need to provide remote work or well distributed satellite employment
This is the opposite of what you said. You implied that people’s expectations of how much house they should have are overly inflated, and that is the problem.
Your second comment implies that the costs of land, permits, inspections, etc outstrip the actual construction costs to the point that building smaller is disincentivized
Your second comment implies that the costs of land, permits, inspections, etc outstrip the actual construction costs to the point that building smaller is disincentivized
Both, I think, can be true. People don't want a closet. Housing anywhere the job nexus is seems to be expensive. (Stupid) regulations seem to be a thing. What is desired might not be possible in the desired areas. I worry it's just not possible.
Home ownership becomes more accessible when homes are cheaper.
Financial instruments that aim to make home ownership more accessible tend to become subsidies to people who don't need them. If people can afford to pay more, homes become more expensive. But those who don't need a mortgage pay less for the same home. Those who can afford a shorter mortgage pay less. Those who can afford an adjustable rate pay less than those who pay a premium for a fixed rate.
Financial instruments that aim to make home ownership more accessible tend to become subsidies to people who don't need them. If people can afford to pay more, homes become more expensive. But those who don't need a mortgage pay less for the same home. Those who can afford a shorter mortgage pay less. Those who can afford an adjustable rate pay less than those who pay a premium for a fixed rate.
Home prices do have a demand side component to pricing…but making it easier to add supply at lower cost is by far the best way to address housing issues.
Most importantly: as a society we can either encourage homeownership as a good investment (appreciating faster than inflation) or have more affordable housing (prices decreasing or increasing less than inflation). There is no way to have both at a large scale. I believe affordability is a better goal, there are many other ways to store wealth.
Most importantly: as a society we can either encourage homeownership as a good investment (appreciating faster than inflation) or have more affordable housing (prices decreasing or increasing less than inflation). There is no way to have both at a large scale. I believe affordability is a better goal, there are many other ways to store wealth.
>Created by Depression-era reforms
Like eliminating Depression Era regulations have worked so well. Savings/loan crisis, 2008 housing crashes, Enron to name a few helped along by removing or tweaking these regs.
>In response to higher prices, lenders gradually extended terms, lowered down payments
That is because of elimination Regulations. I remember a person had to put down 20% in order to buy a house. Also the loans were written by a local Savings and Loan Bank or a Credit Union. These loans were not sold to a Wall Street but funded locally and used to improve the local area.
>In the 2000s the game was in full swing: subprime, adjustable-rate, interest-only and no-money-down loans flooded the market
Again, regulations were eliminated to allow this.
Sorry, I am done reading this crazy article :)
Like eliminating Depression Era regulations have worked so well. Savings/loan crisis, 2008 housing crashes, Enron to name a few helped along by removing or tweaking these regs.
>In response to higher prices, lenders gradually extended terms, lowered down payments
That is because of elimination Regulations. I remember a person had to put down 20% in order to buy a house. Also the loans were written by a local Savings and Loan Bank or a Credit Union. These loans were not sold to a Wall Street but funded locally and used to improve the local area.
>In the 2000s the game was in full swing: subprime, adjustable-rate, interest-only and no-money-down loans flooded the market
Again, regulations were eliminated to allow this.
Sorry, I am done reading this crazy article :)
Let's start with the case against college loans...
I really do not understand the arguments of this article (or the libertarians in the comments complaining about it). It is so vague it offers little benefit to the discussion. The article makes it seem like the government pays a direct subsidy for mortgages. The GSAs do not do that; it insures the 30 year loans to provide market stability and makes money with guaranty fees. Just FDIC and NCUA insurance on private deposits-it is self funding and provides a positive to the market-stability. Same for FHA. This is exactly what the government should do. Private actors otherwise would have to find their own insurance and cyclical changes in the market would likely to higher fees to manage it than what the government is offering.
Nor does the article talk about the direct subsidies because it is very unpopular and the paper may lose readers. Like the mortgage interest deduction or VA loans.
Also, the paper picks out 30 year mortgage loans but leaves out other government incentives; like Trump's recent 20% tax deduction on non-owner operated business income... which really can only be claimed by a REIT as far as I know?
I specifically point out REITs as REITs led to their own share of property speculation.
The government benefits from these mortgages as it helps it develop underdeveloped regions in the nation-allowing them to reach that critical mass to support modern infrastructure and grows the middle class through home ownership. Your views on a community change when you have a decade of your wages invested in a part of that community.
My speculation is some think tank paid from the wealthy is paying for articles to find ways to raise revenue to keep the Trump tax cuts for the wealthy.
Nor does the article talk about the direct subsidies because it is very unpopular and the paper may lose readers. Like the mortgage interest deduction or VA loans.
Also, the paper picks out 30 year mortgage loans but leaves out other government incentives; like Trump's recent 20% tax deduction on non-owner operated business income... which really can only be claimed by a REIT as far as I know?
I specifically point out REITs as REITs led to their own share of property speculation.
The government benefits from these mortgages as it helps it develop underdeveloped regions in the nation-allowing them to reach that critical mass to support modern infrastructure and grows the middle class through home ownership. Your views on a community change when you have a decade of your wages invested in a part of that community.
My speculation is some think tank paid from the wealthy is paying for articles to find ways to raise revenue to keep the Trump tax cuts for the wealthy.
The author claims that 30 year mortgages are a "scam" like student loans. Student loans are a scam because they are not dischargeable even in bankruptcy proceedings; this distorts the true cost of student loans. They are financial millstone for life. Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.