I would be curious to see analysis for what home prices would be with 0 Fed intervention. Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection, that the housing market is some form of a pyramid scheme, where you had to get in early to have a chance.
I would be curious to see analysis for what home prices would be with 0 Fed intervention.
It is an interesting thought experiment. From what I've gathered, any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.
For example, FHA offering 5% down payments instead of a standard 20%, just means every first time buyer can now pay 15% more (approximately) for a house. In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.
It obviously benefits buyers in non-hot markets. It's pretty nice to put $7500 down in the mid-west for a house.
I assume that without any federal intervention, the housing prices would be as accessible as they are today, prices would just be lower so that that the same number of people could afford 20% down and 5-year term mortgages with the resulting interest rate risk.
> From what I've gathered, any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.
You say "any intervention", but you've only mentioned interventions that give more money. Other interventions:
1. Encouraging developers to build new properties, particularly properties for low- and medium-income tenants
2. The government building low- to medium-income housing themselves.
The problem with any policy, of course, which aims to bring down the prices of houses makes everyone who's already bought a house very unhappy.
And they get unhappy because they have been trained to think of housing as investment that should grow faster than inflation rather than a place to live.
I think you've got it backwards. If new cars all cost $200k, would you buy one as an investment? No -- you'd either not buy one (unprivileged) or buy one anyway realizing it's a cost (privileged).
I might spend $100k on a house that I was going to live in for 20-30 years, even if I knew that at the end of that time it was going to be worthless. But I certainly wouldn't spend $500k+ on a house unless I knew I'd be able to sell it for more down the road.
Japan is a really interesting case study here... I don't quite understand how it got that way but apparently it's lead to an interesting/good market for really custom designed architecture where people get their exact dream home best they can afford because it's not going to have much value when they leave it anyway? https://www.rethinktokyo.com/2018/06/06/depreciate-limited-l...
If it's an interest-only mortgage, and you are sure the value isn't going to go down, then fine.
But if you're putting in capital, you have to factor in the cost of money. There are far better things to do with $500k than to park it in an asset that doesn't appreciate.
And of course, you have to factor in the risk that the price will actually drop. Risk isn't free either: it doesn't make sense to take a risk that you may lose money, unless there's a counter probability that you will actually gain money instead.
Even if your monthly payment was less than your rent, you still might be better off doing something else. To get a good interest rate you need 75% LTV; which means on a $500k house you need to put up $125k up front. You might be better taking that $125k and investing it in an S&P500 index fund, and then paying rent, than taking that $125k and putting it into a house and making a mortgage payment. (Obviously you need to do the actual math here to see if it makes sense or not.)
<EDIT>And of course there's the diversification aspect too. If your net worth is $300k ($500k house + $50k other investments - $250k mortgage), it would normally be a really poor decision to have 166% of that ($300k / $500k) in a single asset, whose value could drop drastically for any number of reasons.
All that to say -- if your house isn't an investment, it had better be significantly cheaper than renting before it makes financial sense.</EDIT>
From a societal flexibility perspective, it's much better if most people rent; particularly poorer people who can't as easily from the economic shock of having their house lose all its value. If the bottom fell out of the economy in the city I'm in, and my house's price dropped by half, I could afford to cut my losses and start over. A lot of people are stuck.
I'm told that Germany is very different. It's not at all expected that people strive to own their own home; people rent the same place for decades and are perfectly happy. Because they've never had out-of-control housing prices (at least, not in the last few decades), they can keep things rational.
If the UK's policies suddenly looked like Germany's I'd probably take a massive haircut on the house I own. Personally, I'd be willing to do that if I knew it would make things better for other people; I'd be OK financially. But a lot of people wouldn't, so I understand why it's difficult to change.
ROI on paying rent vs mortgage is negative due to no equity building and the opportunity cost of that money disappearing vs paying yourself with each principle portion of your mortgage payment.
We all need a place to live so a house serves a physical utility as well that other investments do not, in addition to being able to collect unlimited rent when the mortgage is eventually paid off eventually. I think there is a lot of upside to home ownership if it is financially feasible.
You say “to get a good interest rate, you need 75% LTV.” Not true. I have a 30 year 3.25% fixed and that was at 95% LTV. Rates are damn good right now.
It was (and remains) an investment in the sense that it allowed you to live in a nicer place farther from work, or to commute to a job you otherwise couldn't take.
But was it ever an investment as an appreciating asset per se? I'm not aware of such a situation but I'd be interested to learn otherwise.
If the price of the house rises faster than inflation, it is a good investment. However, rising faster than inflation also means that they become proportionally less affordable over time. You cannot have both affordable housing and high returns from housing
> You cannot have both affordable housing and high returns from housing
Sure, you can, but only if real estate in established neighborhoods is more expensive than housing in new neighborhoods, which isn't hyperlocally sustainable but might be sustainable over a broader region.
You sort of can, but it requires increasing density (so per square foot stays similar but those with low incomes can still afford a small place) or older neighborhoods becoming more expensive than newer neighborhoods (happens all the time).
Increasing density likely implies displacing the people presently in the expensive neighborhood for construction. In the U.S. anyway, that’s easier said than done. So that’s definitely a theoretical solution but I’m not sure how practical it is.
Also, inflation causes the value of debt to decrease over time. (Wages are sticky, but when they catch up, inflation causes debt to go down as the value of currency decreases.)
> 1. Encouraging developers to build new properties, particularly properties for low- and medium-income tenants
You forgot to mention zoning law which restrict the supply of housing a lot, much more than any wheeling and dealing cities may do with developers.
Supply is simply not allowed to increase in many areas. It is not a free market, it is government controlled and the priority is to preserve/increase the property values for existing home owners, and restrict where people can live by income. Talk of affordable housing does not come anywhere near making up for the restricted supply in cities due to zoning.
There are other countries that have a much different approach to zoning, there's ideas like land value taxes, etc.
As much as I want new housing, I don't want to live in a dense city. I have lived in apartments long enough to know I don't want to live in an apartment anymore. I was born and raised in the suburbs and I want to continue to live in one. I don't blame people living in single family homes not wanting multiple family homes built near them or fighting infill development.
We really need to reduce the population. It will help with carbon footprint reduction too.
Then they can move further out. Your desire to not live near denser housing does not trump other's dire need for affordable housing.
If you're so concerned about carbon footprint reduction, you should be fighting as hard as you can to ban SFH policies and for pro-density policies, since land-use and long commutes are such massive contributors of climate change.
Your own contributions do nothing in comparison to societal changes.
If I die (lowest footprint possible), it has almost no impact on society in terms of climate change. But if I change behaviors of many (through legislation...) then that is enormous in comparison.
Affordable housing that is also low on climate impact (higher density and close to places people need to go) should be prioritized over “I want 10 acres of land”.
No conversation about England and housing is complete without discussing Right to Buy where affordable public housing is privatised and then has its value rapidly rise to meet market prices.
>just means every first time buyer can now pay 15% more (approximately) for a house
Wait, what? Wouldn't it mean that a pool of prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house? That's a shift in the structure of the market rather than just a change being "priced in" for the same set of buyers.
>In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.
I would think this is the kind of question where we need data. I like to think I respect the exercise of thought experimenting more than your average person, but in this case, it seems to illustrate how thought experiments serve to answer questions by restating their core assumptions rather than exposing them to challenges in the way data would.
> Wait, what? Wouldn't it mean that a pool of prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house?
No. Real property doesn't work that way at all.
The effect of most of this kind of government intervention in the housing market is to subsidise developers.
In fact it's so bad that in the UK shareholders of such a developer are outraged because the uncapped bonus structure for executives at the developer means they get enormous (many times annual salary) bonuses essentially directly funded by central government which the shareholders of course think instead ought to all be profits assignable as dividends, not "bonus payments" for executives whose "performance" amounts to just sitting back and collecting free money from central government.
Like there's not even doubt there about what this government money does, it goes to the house builders, it can't and doesn't magically produce more homes, the argument is about who gets to keep the loot.
Government can intervene to actually build homes, and that would actually work, but NIMBYs hate it, so if a government doesn't actually care about housing people then a policy that can be headlined as support for home buyers but actually just puts money in the pockets of the wealthy is a good choice.
I carefully read through the rest of the comment after this sentence, waiting for the support for this claim, and feel as though I came away emptyhanded. I get that the shareholders anecdote is supposed to support it, but that came off as really fuzzy and unclear, and not something that directly engaged with my question. Are you saying there are no new buyers? Do you have any article that talks in more detail about the systematic relationship between shareholder expectation of dividends and their relationship to the switch from 20% to 5%? Or some elaboration on how the debate between shareholders vs executives relates systematically to the change in requirement for down payments in a way that clearly describes how it absorbs most of the gov funds?
I gotta lay my cards on the table, here. I feel like if any of this were true, I would have received a really simple, one sentence reply of "sure, here's a link!" that links to an article deep in comprehensive macroeconomic data, and not a weird meandering anecdote about developers carried not by any evidence, but mostly by the gravitas of emphatic personal assurance that just declares that "this is how it really works".
The rest of the comment isn't support for the claim that real property isn't like this - instead it assumes you've been shaken awake by the realisation that oh, these aren't toasters or smartphones, they're homes, and thus real property, and so the usual free market hand waving doesn't apply at all.
But if it wasn't clear I'll explain. The reason real property isn't like this ought to be entirely obvious at a very high level, the planet's surface area is independent of economic forces. If we've got twice as much money for smartphones, we can buy twice as many smartphones. But if we've got twice as much money for buying land in Ohio, there is still only the same amount of Ohio, and so the price just goes up.
You know, I actually thought you knew what you were talking about and were going to have something thoughtful to say. To answer directly: nope, this does not help at all. I was expecting something like a discussion of, I don't know, pertinent micro or macroeconomic forces, maybe something about elasticity as applied to housing, or citation of some article illustrating how a change in financing in one region had a measurable impact on prices and the number of buyers, or something of that nature.
Instead you are condescendingly lecturing me about the shape of the earth, and telling me the rest of it is so obvious you can't bother explaining it. But even I know we haven't run up against absolute geographical limits, and to to the extent that the shape of the earth is an influence, it one among many, in a process that is also mediated by additional influences, as well: constraints of availability of housing already built, the rate of new construction, changes in financing, population growth, people's savings, changes in how many people choose to stay at home, etc. I was waiting for some economically literate discussion of those kinds of elements.
That's correct. Developers sell homes. The FHA loan uses government money to allow people who buy homes to pay more money for the same home, this money goes to the developers.
It's definitely an interesting question. Increasing the pool of people able to buy a house increases demand, so that probably has some impact on the price.
Another factor is that people tend to think in terms of monthly payments, rather than overall price and interest rate. For example, I'm paying $1,500 in rent while saving $500/month for a mortgage. If the requirement for a down payment is removed, I may then think it makes more sense pay $2000/month for a house now with a low down payment than to keep trying to save a down payment while prices keep increasing.
FWIW, this is exactly what happened (with different numbers) when I bought my first house.
> prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house?
hence the measures are popular and very visible. Long term however (just as with subsidies and scolarships for education) all lead to pushing prices up.
Perhaps the buyers in the market could pay 10% but now that they only have to pay 5% the remaining 5% slowly (say over a few years) gets factored into the purchase price so that the down payment is the same as it were for 10%.
> Perhaps the buyers in the market could pay 10% but now that they only have to pay 5% the remaining 5% slowly (say over a few years) gets factored into the purchase price so that the down payment is the same as it were for 10%.
Are you proposing that the effect is to nearly double house prices in a few years?
If today’s price is $500K and buyers could pay $50K down, in a few years, that place would need to be $1M for the 5% down payment to be the same figure.
I believe op is saying that a person could “afford” a $500k house at $100k down at 20% would happily instead put $25k down (or $28.75k, to keep numbers accurate at a 5% down) on a $575k house.
Just because you can afford a down payment doesn’t mean you can afford the mortgage. I could probably cobble together 5% of a $1M house for a down payment but I could not afford payments on that mortgage. But if I could magically put 75% down, I probably could make the payments on the remaining $250k mortgage.
What I'm not sure I understand correctly is the second half of OP's content [how the change in downpayment requirement causes prices to rise such that a 5% downpayment is now the same as the prior 10% downpayment].
If you consider that the $500k house in the example is the same house that goes for $575k, then housing prices just increased to absorb the eager buyer at a lower percent down. And when the neighbor goes to sell, they see a similar house as their own sold for a higher price, so they try to sell for a higher price.
Right, at first. But do this over a few years and the housing market continues to expand and grow. The housing prices continue to go up and the required down payment continues to proportionally rise back to the point of market pressure pushing back. I don't think that half a down payment equals double the house cost (even in the long term), but it is just one more example of supply and demand. If you lower the upfront or monthly costs for something, then demand should go up which will push prices back up. Econ 101.
> If you lower the upfront or monthly costs for something, then demand should go up which will push prices back up.
Guh... I don't feel like I'm the expert here, but even on this little quest of mine to get a straight answer I feel like I'm finding one obvious conflation after another after another, as is the case here. Why would we assume that increase in demand pushes prices back up? It might, instead, reveal that lower prices are more optimal because they bring in more new buyers and more revenue overall. It may be that lower prices result in a larger total pool of buyers willing to spend a larger total amount of dollars at the lower price, which turns out to be a more optimal price, which is also econ 101.
It's better to sell big macs for $3.99 to billions of people than to than to sell them for $9.99 to millions of people.
Using a naive supply/demand optimization, that's true. But housing is a hyper-local market, and you have to apply that at a local level instead of a macro level.
Areas with more supply than demand already have easy access to home ownership. If someone's goal is just to "own a home", then they can already get one for 0% down by moving to a rural area[1] or an impoverished metro[2]. Even with no capital requirements at all, these areas struggle to attract interested buyers.
Areas with more demand than supply are already building as much additional supply as feasible within the the localized constraints (which could be geographical/physical, or could be governmental/zoning). Decreasing upfront capital requirements from 20% to 5% increases the size of the demand pool, but the supply was constrained even before those new entrants. So the increased competition will just result in pricing appreciation, as the existing demand can use that 15% spread in additional capital they have to out-compete the new entrants to the market. While some constraints are artificial (such as zoning) and could be removed to increase the available supply, those empowered to do this are the existing residents of the area who are enriched by this price appreciation. So they're perversely incentivized to reinforce this imbalance in supply/demand, rather than to take action to correct it.
There are likely some localized markets with more supply than demand (or the ability to increase supply in the face of increased demand). And these would react as you expect, with lower pricing available to maximize that demand. But this situation is transient in nature, as the more developed an area becomes the more likely they'll run into natural supply constraints (or have artificial ones introduced). So it'll eventually lead to one of the above situations: they have too much supply and have to essentially beg people to move there, or too little supply and pricing appreciates in response to the new demand.
> For example, FHA offering 5% down payments instead of a standard 20%, just means every first time buyer can now pay 15% more (approximately) for a house.
Assuming they had the same deposit available they would theoretically be able to pay 300% more. Of course they probably wouldn't be able to demonstrate their ability to service a loan that large.
They're not gonna pay 300% because they wouldn't be able to pay even the first monthly mortgage payment. Buyers aren't stupid -- they'll take advantage of low money down but they won't get themselves into a mortgage that they literally already can't afford the payment on from day one. No, the way mortgage problems typically happen is that the payments are initially affordable but then something changes (typically job loss).
People will absolutely try to take out mortgages they can't afford. Post 2008 rules make giving a mortgage to someone who can't afford the first month nearly impossible, but you can still get a mortgage that will crush you without a job loss.
Waves from 2005 where people literally could not afford the loan they just were given. I knew a couple of people who just planned on flipping so didn’t worry about the inability to service the loan.
> It obviously benefits buyers in non-hot markets. It's pretty nice to put $7500 down in the mid-west for a house.
Unfortunately banks won't loan what they see as small mortgages like that. This leaves the lower priced homes only available to landlords buying cash. I live in a home like this myself - all the banks would happily loan me $215,000 with $35k down, but no bank would loan me $15,000 to buy a $50k house. There's many people renting in my city that have decent credit that could easily afford one of these lower cost homes, but instead the houses stay empty or get turned in to rentals.
> all the banks would happily loan me $215,000 with $35k down, but no bank would loan me $15,000 to buy a $50k house.
This seems like a made up problem. Those same banks would also gladly loan you $40k with $10k down, and you could have the remainder to fix the house up or make huge payments every month. Furthermore, if you already have $35k it shouldn't be too difficult to save another $15k and buy the house cash. If it is, you probably can't qualify for the mortgage payment on either property based on your income.
Huh? This is nonsense. You can indeed buy a 50k house if the house appraises at that value. You can also get an improvement loan included to make it livable as well if necessary.
when people are living (and budgeting) paycheck to paycheck, with low interest rates, the prices go up a bit more than 1:1. It becomes all about what monthly payment you can afford.
It is an interesting thought experiment. From what I've gathered, any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.
It benefits home owners, which (at least in Canada) makes up the majority of the voting base. Like GP said, it's at the expense of the next generation of buyers.
>any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.
If a large number of mortgages forclosed without the fed this would put a hell of a lot of downward pressure on prices. Economic carnage style. That hot market. It's getting pretty cold. Does that make houses more affordable for those frozen out? Or are they now unemployed with the zero intevention and/or unable to get a loan in that cold market making the benefit from the carnage nothing?
Whether it's the right thing to do for the overall economy and all in it, keeping house prices up is clearly something the boomers want so they can keep their very large gains from having got in early. Younger generations may look at this and see more than simple coincidence.
Just look at the chart on page 20 of this Fed paper (the Fed was created on 1913, the fiat dollar became the global reserve currency in the 70s after years of debasement to pay for the cold war, vietnam, etc.)
Perhaps the better chart is on page 21 (Figure 16), where as compared to all the other countries surveyed the U.S. is at the far low end of housing price inflation. In fact, unless I'm missing something it comes in dead last among all 14 countries at the end of the sample period, 2012.
The US as a whole has low housing prices. But that is including all the homes in Nebraska and other places most HN readers don't want to live in. The home prices in the ~10 cities people on HN actually want to live in are much higher and not affordable for most people. And the good jobs are only in the expensive places, unless you're a doctor or something like that.
See section 4.3 Urban and rural prices move together. Urban prices may be unaffordable, but the data suggests they haven't inflated faster than rural. Perhaps urban/rural is too coarse a distinction to reflect the effects in major coastal cities, but the return to coastal cities didn't begin until the 1990s. Price inflation indeed accelerates in the 1990s in the U.S., but excepting Japan[1] it accelerates in all the other countries even faster; likewise for the 2000s.
[1] Presumably still reeling from its 1980s property crash.
See my reply to jeffreyrogers: WWII reconstruction can't explain the 1990s and 2000s, which are far removed from that era, with the possible exception of German Reunification. The trends are consistent and robust across various periods.
Perhaps the other countries are more supply constrained than the U.S., especially post reconstruction. But that also refutes the insinuation that U.S. monetary policy is responsible for price inflation, and makes less credible the fears of some younger Americans that the bottom will fall out irreversibly the moment they make a home purchase.
Maybe, but the fed exit strategy will be inflation not default would be my bet. Defaulting or causing people to default on debt is how we truely get another great depression. Inflating our way out, if controlled, might be ok. Maybe. It'll ruin the dollar as the world reserve though would be my thinking and many others. Not my idea here, just makes sense to me.
If interest rates can't go any lower (and there isn't much room, unless we think negative yield mortgages are possible), and the Fed chooses to inflate the currency (which I concur, would be a most likely response, as the alternatives have far worse consequences), then the real value of homes will decline-- though the nominal dollar value could stay the same.
To clarify, negative after fees. The Danish mortgages are not negative after fees. The question is, could we cross that line? Then the bank wouldn't be making any money on the loan.
Prices would be very low and unemployment would have averaged 50% for the last 12 years.
I’m half joking, but if the Fed did nothing then we would still be in the middle of the Great Recession. Or consider the British “Great Depression” of the late 1800s — that lasted 20 years because the pound was over-valued.
The interesting question is what would have happened if the USA had directely nationalized and restructured the failing banks rather than loan them money after the subprime mortgage crisis and if it had supported the economy through productive investments in infrastructure rather than lowering the Federal funds rate.
By allowing you to restructure them before privatizing. The crisis was a failure of gouvernance. Most of these banks were going to and should have failed.
Once it was agreed that they were too big to let the situation run its course, it would have made sense to step in and actually solve the systemic problem.
Both Democrats and Republicans acknowledge that the Great Recession was caused by government housing policy. So presumably - if we had a small government with no Fed - we would also have no Fannie Mae and the Great Recession would have never happened.
Not to be snarky or obvious, but you should do what the people in the past did - find a better place to live that allows you to buy a home more easily.
That's one of the reasons why there was a big migration to places like LA. Lots of jobs and cheap land to build on.
To me, SF is like NYC. Unless you got in early or are one of the 1%, it's not a great place to try and build a life in (if you're looking to own a home).
Housing (and construction) prices have been ballooning out of control everywhere for the last several years. Both major cities (DC, Boston, Portland, Seattle, Chicago, LA, Denver, San Diego) and secondary cities (Boise ID, Grand Rapids MI, many more) are all totally unaffordable. I’ve spent hundreds of hours researching different areas over the last year. Looking at sold homes from just 2-3 years ago, many seem like a steal compared to what’s available now. It’s just extremely bleak.
Meanwhile, my landlord bragged about buying the house I live in with no money down and no income check during the subprime mortgage era, and has been renting it out since. Now he is selling it during a pandemic and I’m about to become a vagabond.
I do think the vacuuming up of affordable housing by real estate investors (perhaps many of whom accumulated wealth via the surging stock market) is at least part of the problem. Landowners have strong incentives to keep the housing stock low (and the rents high), or they get washed.
What data are you looking at? Median home price for Chicago (where I live incidentally) is 229,000, for Dallas is 225,000, for Houston is 197,000 according to this source [0] and those are the 3rd, 4th, and 5th largest metropolitan statistical areas in the United States and Dallas and Houston have both grown a whopping 19% in the past decade [1]. Trick is, they all still have plenty of land to build new homes on to keep up with demand growth.
The median home price doesn't mean much in Chicago. Most homes in the desirable neighborhoods are 1BR and 2BR condos and well over $300k or include outrageously high HOAs ($400 - $1K). There are thousands of sub $200k homes in the city but they're located in dangerous under resourced neighborhoods to the south and far west. In either case, you will pay 2% property taxes, which means comes out to $400 a month in property taxes -- about twice the amount you'd pay in any other part of the country. And that's in addition to 10% sales taxes and 4% income taxes. The only other places with property taxes that high have no income tax (Texas) or are near New York City.
Chicago isn't nearly as great a deal as it's made out to be.
"desirable neighborhoods" in Chicago is code for living in a bubble (should be very firmly noted that this is NOT race-related). Yes, you pay a lot more for that. There are neighborhoods in the city that have lower crime, faster access to downtown, higher median incomes, better-rated schools and lower house prices than many of the "desirable neighborhoods". The Near South Side is an obvious example.
However, you can look at the tax rates within Cook County and even compare them to the suburban counties [1]. The composite property tax rate is as low as it gets around here. Most cities are double or triple the Chicago rate.
It isn't as good of a deal as when I moved here, but if you've got a tech or other white-collar salary, Chicago is still a really good deal. It's your responsibility to consider cost when choosing a location within the metro area. If you ignore it, you shouldn't be surprised that you pay more.
EDIT - Illinois and Texas heavily depend on property taxes for local funding. The actual rates you pay have an insanely high variance from city to city. Some taxing districts don't align with city boundaries either, so one neighborhood may pay more than another. You can use it as a proxy for how well-run a city is, but on the other hand Chicago isn't a particularly well-run city - it just has a huge amount of high-value commercial and industrial property (which is taxed at double the rate of residential property). If you're going to live in either state, you really need to look at the hyper-local tax rates and put that into your decision matrix. The data isn't even hard to find.
Indeed, my shortlist is Chicago (and maybe Grand Rapids) at this point. I’ve always been in love with Chicago—such a gorgeous city. Housing wise, I’m enchanted by the industrial brick and timber loft condos that there seem to be a lot of for decent prices.
Can you recommend other neighborhoods besides Lakeview/Lincoln Park? Those are the only areas I’ve spent significant time in aside from downtown.
It really depends on where you plan to work, where your friends are, etc. I would recommend that you rent for a year or two and spend time exploring neighborhoods. You'll find a location you love eventually. There are definitely dangerous areas, but you're going to hear a lot of very outdated advice such as "never go south of Roosevelt" when in reality from Roosevelt south to Hyde Park has seen an incredible renaissance over the last 20 years.
FYI, brick and timber loft condos are super cool, but they usually have strange layouts and the buildings tend to require a lot of maintenance. Don't let me scare you off, but you're going to want to rent one for a year before buying one, just to make sure.
The Near South Side is a desirable neighborhood and the situation there is as I described. It's small condos with exorbitant HOAs. Do you mean Bronzeville?
I'm glad you think so; many northsiders do not! But you know that, for example, the Near North Side has an average price per sq foot that is $50-100 higher than the Near South Side.
I bought a 1700sq foot house that was ready to move in, in a pretty quiet and safe neighborhood, with decent (but not amazing) schools, in a suburb of Chicago for $230k with no HOA fees just 2 years ago. There are neighborhoods here that are really expensive, but others that are more affordable.
If I worked in the city I would have at least an hour commute each day, though, but it only takes me 30 minutes to get to the city outside of normal commuting hours.
Property taxes are kind of high around here though. I think I'm paying about what you're saying, and some of the homes I looked at (but decided against) were over $6000 a year in property taxes. Those were in areas with really good schools though.
Also Illinois as a whole as a state has one of the highest overall tax burdens in the country, because the state is pretty much broke, so that might be enough to stay out of Illinois.
You could actually find a place just over the border in Indiana, though, and have the same commute to downtown Chicago as I would have (about an hour) but suddenly have a much lower tax burden. I've worked with several coworkers in the past that commuted to the suburbs of Chicago for work every day from Indiana, it's doable.
The past few years have hit the construction industry hard, with the trade war spiking steel prices, the crack down on immigration combined with low unemployment reducing the workforce, and now there's a lumber shortage to go along with the pandemic. I built a house during the beginning of this mess and it was painful: it took 13 months to build a house that would normally take 8.
The cost of construction has risen such that I can't find a new construction house in my area for under $400,000 with the median on Zillow being $495,000. And this is for an area in the midwest that those reports you link report "median home price" of well under $200,000. If you can't build cheap houses, then soon there won't be cheap houses.
A lot of cities on that first list are reporting 10%+ YoY changes. That's significant. Those used to be numbers you'd see in Seattle Washington, not fucking Allentown Pennsylvania...
Here is some data backing up what I’ve been (mostly subjectively) observing. In particular, look at the skyrocketing median list/sale price (+10% YOY) and the YOY changes in sale price since ~2010. Also, medians are of course just an aggregate measure that does not tell the full story—low quality cookie cutter developments drag the medians down. Older homes in decent neighborhoods are even hotter.
Grand Rapids? Unaffordable? Are you looking at condos downtown? Here's[0] a 3bd/2br with 1800 sq ft that admittedly is outside of downtown a bit, but is under $1000 a month. This condo [1] is more expensive, but would be totally affordable if 2 people were able to pay $1250 in rent by themselves. Both of these were on the first page of Trulia results when I searched for Grand Rapids.
A condo in GR is a possibility for sure, though you have to admit the market there has gotten ridiculous in recent years. Most of the decent houses near downtown get multiple offers instantly (same in Kalamazoo).
Is $1250/mo a realistic amount to charge a roommate in GR?
If you really want that downtown life, then it may be realistic. It's definitely a lot cheaper than a corresponding condo of that size in a major city.
If you're considering Chicago unaffordable, I'm really curious what you think is affordable!
When I moved here, I was blown away that house prices where I live, about 30 minutes from downtown, are on average $150k, or less than 3x median yearly income here. This isn't actually drastically different from a semi-rural Missouri town I lived in for a bit.
Do you live in Indiana? Did you move ten years ago? I can't think of a single safe neighborhood in Chicago or its surrounding suburbs that are $150k today.
Now I don't really know anything about Rochester. But you would be hard pressed to find anything in a city for ~50-60k in Australia. Not comparing Apples to Apples, but the 1 bedroom apartment I bought in Melbourne suburbs in 2016 was AU$265k
If I look at somewhere like Bendigo (about 2 hours from Melbourne). The cheapest houses are about 250k.
Rochester is definitely cheap, but for a reason: It's a city on the down slope past its peak. It's a deindustrialized rust belt city with a population down 38% from its pre-WWII high. That goes a long way to explain why housing is so affordable. And I wonder what the tech job situation is like there (though that may matter less now, what with the pandemic increasing the acceptability of WFH).
It's hard to move somewhere for cheap housing where you literally wouldn't know a single person, though. Social life is important.
Also, there's the winter weather. I hope you like cold and snow.
> It's hard to move somewhere for cheap housing where you literally wouldn't know a single person, though. Social life is important.
And this is fine, but it seems very disingenuous to say that it's a crime that you can't afford to buy a home when you refuse to move out of arguably one of the most expensive cities in the country. It's equivalent to crying about not being in the 1% when you're in the top 1.5%, and you could move if you wanted to.
There's nothing wrong with wanting to live in San Francisco, but expecting to buy a home a few years after graduating from college is ridiculous in my opinion.
This tale does not reflect reality when you look at the numbers. Housing prices have more-or-less always gone up, especially on time scales long enough to spread out market corrections. If housing prices 2-3 years ago "seem like a steal" (they don't), and the same has been true every 2-3 year cycle (it hasn't), an FHA/USDA mortgage with 3.5-5% in basically every market other than San Francisco and NYC makes sense, and if you're making software developer salaries it should take less than a year to save up 3.5% of a home you can afford (again, other than NYC and SF which are outliers).
Since you're spent a lot of time researching this: have you ever found a way to correlate 3rd-tier and below cities with fiber internet speeds and infrastructure? Seems like that info would be useful to a lot of people here, who are looking to move to a more rural area but are working tech jobs remote long term or even permanently and need fast internet.
By “research” I really meant “searching, then searching again...and again”, not actual research. Word choice is important in HN comments because you all are too sharp.
I haven’t looked at that, but I have wondered how universal satellite internet coverage and the more permanent (?) move towards remote work will affect rural areas. It is an interesting trend to keep an eye on.
I live in a small town, about 20min away from the larger city, with FTTH and reasonable cost of living. There are disadvantages to living in the country (you have to drive everywhere), but it's just a balance.I definitely enjoy zero crime, no traffic, fresh air and a large lot so I am not crammed with my neighbors. The downside is that I can't walk everywhere, but that is fine.
We are having precisely the same convo in my family, in the Czech republic.
My wife is from Prague. A gem of a city, but unaffordable. Too much speculative capital from Russia, China etc. Being a slave of a mortgage until 70 is a ghastly prospect.
I am from Ostrava, a post-industrial city where property prices are about a third of Prague level. Incomes are lower, but not that much lower. For an accountant (my wife is), the difference is about 10 per cent. Overall, much easier to sustain middle class life standard.
She does not like the idea of leaving her native city, but if we manage to have a child (still a very open question), we will have to, at least for a few years.
If you can rent significantly cheaper than total cost of servicing loans etc, consider investing the difference in index funds and rent as cheap as you can.
It might be a good bet, especially if speculation in housing is slowing down compared to the last 20-30 years.
It's possible the problem isn't speculation, but the rate of return on capital vs the rate of return on labor.
If capital dominates, you're going to run into scenarios where it's fundamentally impossible to ever afford scarce goods that generate returns, because someone who started with more capital will now have an even larger delta with you, and is therefore able to outbid you.
Well said. Another way of looking at it: in the long term return on investment (r) > economic growth (g) because “everyone” gets g but people with capital also get r.
Not all capital generates the same returns. Index funds have virtually no gatekeeper—you can open a brokerage account, toss in $10, and be an honest-to-god capitalist. And stocks tend to outperform real estate by a hefty margin. So catching up is possible.
"Extremely supply-limited cities" could just mean outliers like NYC or SF, or it could mean literally every city in the country, depending on your definition. And by definition, isn't it impossible to have an extremely supply-limited city with very little barrier to home ownership?
Historically, equity markets and housing provide similar returns when you factor in rent according to this super interesting harvard paper on "The Rate of Return on Everything, 1870–2015" and the corresponding HN discussion [0]. Far less liquid and actually more stable though according to the paper.
I would think the stability is in part due to its illiquidity. If the market drops 10% and you've "heard" it's going to drop another 40%, you might dump everything. If you don't get back in at the right time you can lose even more than if you had just stayed in throughout the drop.
It's rare for folks to immediately dump their investment properties because the housing market has cooled off.
I honestly don't think "tossing in 10$ to an index fund", i.e literally pocket change, makes anyone a /capitalist/. This is not an argument in good faith relative to the reality of capitalism we live in.
It was in good faith, I promise. I think there are multiple definitions of capitalist that are broadly used. I meant it in the “investor in a business” sense. Also, it may be important to reiterate: the idea isn’t to just invest $10 and be good to go. It was just meant to highlight the low barrier to entry, which is very different from buying a home.
This is a side effect of urbanization. Economic opportunity is increasingly concentrated in cities and the increased demand inevitably increases the cost of housing.
If that cost becomes too high relative to the income increase gained by living in, say, SF, people will certainly move elsewhere. But they'll still largely move to cities, and the cycle will just repeat there.
There's a degree of purpose to artificial scarcity though. If construction is completely unchecked, then the demand, and load on infrastructure can reach a point where it becomes unusable to everyone,old and new residents.
I've lived in Toronto for a long time, and after pockets of th city got rezoned and high-rise construction was allowed, it created a situation where it was not possible to get onto public transit during peak hours, and people resorted to walking to work for 45 min instead of their planned 15 min commute when they brought their condos pre-construction. Similarly the growth of immediate Toronto suburbs has been so immense, that it is not possible to get a seat on the subway if you don't board at the terminus station (as suburbanites fill them). The city is addressing these problems through transit expansion, but it is taking decades for each project to complete (example https://en.m.wikipedia.org/wiki/Line_5_Eglinton).
The main point is, zoning in a vacuum is not evil, or if more palatable, a necessary evil.
Not just surrounding cities - to your point, above them. All those single family neighborhoods. All those new buildings built to 6 stories instead of 60.
In Seattle, basically every building built is built to the maximum zoning allows. And it’s all arbitrary - purely about the whims of the local homeowners.
My parents moved to Charlotte, NC in 1999. It amazes me the sheer growth in HOUSING in city center. There are several new buildings well beyond 6 stories. There are even more new buildings in the 3-8 range in areas like South End. There are even more single family homes further out of the city.
It may not be perfect, but it's seriously beautiful and developed nicely in the last 20 years.
It can't be understated what a huge impact the Lynx Blue Line (light rail) had on Charlotte's ability to shape and concentrate their growth in the past 15-20 years. Developers started planning and building around it well before it opened. Strong transit can make a huge impact on affordability, especially if it frees families up from the burden of car ownership (expensive depreciating assets with large operating costs).
There are drawbacks. But find a lower cost of living city and the savings on housing means you could probably fly back home once a month and still be ahead.
Eating your cake and having it too is literally impossible, but having affordable housing absolutely isn't impossible. We just need to go back to the more permissive housing construction days of yore when we actually built enough housing supply to satisfy rising demand. That's why housing was so affordable until just the past few decades. We could have that situation again; it's not literally impossible.
I think you’re romanticizing the prior generation. Sure they could buy a house with a blue collar job, but they weren’t doing that in NYC or other top tier cities and they often lived in much smaller home. Maybe 2bed/1bath 1000 sq ft house for a family of 5.
My entire extended family struggled a lot when growing up in the 50-70s.
It’s easy to look back at those that lucked out and bought a house in a prime location in CA (before it was prime) and say how easy they had it. You’re just ignoring all those people who did the same in Ohio and Michigan and lost their jobs and have houses worth about the same as when they bought it (adjusting for inflation).
There are extremes at both sides of the spectrum - Detroit real estate plummeted, San Francisco real estate skyrocketed.
You're right to point out that there isn't one narrative that defines the prior generation. Some people lucked out, others didn't, but the reality is that on average (both median and mean) home prices have drastically outpaced wage growth for the past few decades, which is obviously unsustainable.
The best the younger generations can hope for is to eventually have enough wage growth to afford a home that hopefully holds its value.
Worth noting that [in the US] a large part of the previous generation ended up living in cheaper suburbs because of flight from urban areas, which also made those urban areas cheaper.
I mean this is an excellent point. There was a reason they built semiconductor facilities where Silicon Valley now is, and why all the housing is so drab. It was not a highly desirable place to live back then. At today’s prices, my parents couldn’t have afforded to live in the drab DC suburb where I grew up. But there were almost no jobs paying six figures in the area back then, nothing like today.
> Unless you got in early or are one of the 1%, it's not a great place to try and build a life in
I mean, even if you got in early, you're still locking up lots of wealth in housing, an opportunity cost that could be differently spent.
For example, suppose you bought a place in NY in the 80s for 200k that's now $3m. Sure, you got in early and your mortgage has been paid off and you live without any housing expenses (outside of taxes, hoa etc, let's for the sake of argument ignore those). Let's assume we consider this to be living in 'free housing'.
But the S&P500 does 10% a year on long-term averages. It is still fully up to you to say, I like living in NY so much, that I want to forgo selling my home for $3m, putting it in the stock-market, and earning a passive average $300k a year (which compounds if left (partially) unspent, for example it'd turn into $770k a year after 10 years if not spent).
That $3m property, then, is at times a greater portion of someone's income than their own salary. I know some old people (50-60) who have nice careers, make $150-200k, yet live in a property in which $200-300k of annual investment income is locked-up. In a way, these people are 'spending' $200-300k a year on housing, while an alternative housing choice (e.g. renting a place for $3k somewhere else and selling their home and investing it long-term) would cost maybe $30-40k.
You can argue the details like whether the $3m or 10% stock return is accurate, they're just examples. But the point still stands, even those who got in early and continue choosing to live there, are continuously forgoing a lot of money (which can translate into a very high quality of life elsewhere).
I live in the capital of a EU country and own a home outright. In terms of monthly cashflow, housing is not a big deal as I just pay some taxes. Yet it's starting to weigh more heavily on me whether to stay here, or whether to sell my home, take all that money and enjoy a much higher income/consumption level elsewhere.
I used to really enjoy the city and all that it had to offer, but sometimes I now find myself just working all the time, with barely any energy, time or motivation to make use of it to its fullest.
I don't think enough people consider that you can be so called 'house poor', while owning an expensive home without a mortgage.
I’m not sure about the EU, but in the US you could do a cash-out refinance. Effectively, liquidate your equity in the house in exchange for interest payments that go to the bank (~3%), then invest that cash elsewhere.
The problem is that at the same time, the good jobs are being concentrated in a small number of cities.
Even if someone is willing to move to a cheaper place, they find that relative to the employment available, it isn't much better.
In the end, they realize that no matter what they choose, they need to struggle incredibly hard just to get a similar quality of life to what a baby boomer was able to achieve with a high school diploma and a manual labor job.
More difficult than the baby boomer generation most certainly, but not impossible.
You could take the arbitrage further by increasing upfront and post move earnings and decreasing future expenses:
- Save up "no thanks" money at the high cost of living place. Not "f* y" money, but a significant sum.
- Ideally, find a remote job at the hight cost of living place.
- Relocate to a low cost of living place with decent socialised medicine. This can lower provisions for future expenses _a lot_.
At least in the EU, there are nice and safe places with very low real estate prices, quite decent socialised medicine, very low taxes and easy cheap transportation links around the continent.
Nice and safe places in the EU are expensive and there is not much space. The ex USSR countries are cheaper but I wouldn't recommend moving there.
In western europe:
Real estate is more expensive than the US, public health care is a bad joke at the expense of the taxpayers and whenever you need something more than "I have a stomach ache", you go private. The main difference with the US is that our government doesn't intervene in the health care market (too much) which means our private health care is quite affordable.
Taxes are generally on par with the USA in most countries.
Fuel costs more but few over-expensive cities (eg London, Paris) have barely decent public transport (not that cheap though).
Some countries have it better than the US but the jobs pay significantly less.
I would say the UK is a good compromise in terms of costs of living, low taxes, high salary and weather. Even though tax-wise things may change for the worse, given the cost of covid's lockdown.
Another approach would be to look into some poor islands or places with special tax regimen and being able to command a high salary remotely because of your experience. I'm not sure how much more this strategy is going to work in the future, though: if everyone is remote, wages should go down / be linked to where you live.
Overall, I'd say a few countries are better than the USA, but most of Europe has several disadvantages.
I have some friends who found happiness in South Asia, but that's a completely different mentality.
It would be great if people would make more videos about this and spread them around so Americans (I'm one, this is not a put-down) would know more about how life actually is in the rest of the world. (I don't know that much about the rest of the world either and would watch.)
I mean, actual honest comparisons of health care systems, police, judicial system, politics, and so on.
For example, most Americans who don't have friends from other countries might not be aware how absolutely insane the prices for cars are in some countries.
"At least in the EU, there are nice and safe places with very low real estate prices, quite decent socialised medicine, very low taxes and easy cheap transportation links around the continent. "
For solo developers or childless couples, Riga, Latvia is not too bad if you can stand the long winters:
- The socialised medicine is not as bad as one would think. If that doesn't suffice, additional private medicine is affordable.
- The tax regime is simple. Rates are relatively low.
- Transport. Within the city, public transport is not too bad and taxis are very very affordable. In non-covid19 times, all of Europe is one cheap flight away.
Oh, the irony of writing this from overpriced Leuven, Belgium :-)
Consider Baltimore. There's some tech work in the city + a good chunk between Baltimore & DC. Areas like Locust Point, Roland Park, Hampden, Fells Point, etc.
The pyramid scheme isn’t a new thing, sadly. The chart for median home prices shows it starting at least as far back as 1997. Maybe as far back as 1976.
> Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection
Millenial here. 100% agreed with this. Feels like a big blind spot in the boomer crowd. They don't seem to see the seething, roiling, overpowering resentment their entire generation is receiving from many, many people that currently don't have much power in society.
A politician wants to win office, and lower the probability of a civil war.
Recognizing politicians historic-low approval ratings, a politician would propose something radical:
1. Make student loan debt equal under the law to any other form of debt
2. Implement a national zoning system similar to Japan's zoning[0], eliminating the housing crisis, rolling back a century of racist and exclusionary laws that ruin lives and act as an enormous drag on everyone in the country. Hundreds of millions of Americans are now richer and much more at peace with each other.
Said politician would instantly win the popular vote. Unfortunately, these policy positions are at odds with power brokers in the USA, so no politician will ever seriously propose these policies, or they'll get to office, and be informed that these policies are no longer going to appear in their speeches.
If student loan debt was treated like any other debt then few if any students would get loans, unless their parents had assets to put up as collateral. So long as the financial burden of education falls on the student first then this is unlikely to change.
From a financial perspective it’s a terrible product to sell... tons of money to someone with little to no financial assets, iffy prospects of sufficient future income and no underlying assets that the bank can put a lien against in case of default. The problem is not the loans, it’s the whole higher education system that needs a total overhaul including the utility and price of higher education. The current system is based on the idea that many people’s parents encountered where a good summer job and maybe a bit of savings was more than enough to pay for a decent college degree!
> If student loan debt was treated like any other debt then few if any students would get loans, unless their parents had assets to put up as collateral. So long as the financial burden of education falls on the student first then this is unlikely to change.
Right, and an investment in the public school systems and community colleges would make them more affordable. If what the government wants is more lower income families in higher education there are many ways to achieve it. The current system encourages the astronomical increase in inflation adjusted cost of education.
> From a financial perspective it’s a terrible product to sell... tons of money to someone with little to no financial assets, iffy prospects of sufficient future income and no underlying assets that the bank can put a lien against in case of default. The problem is not the loans, it’s the whole higher education system that needs a total overhaul including the utility and price of higher education. The current system is based on the idea that many people’s parents encountered where a good summer job and maybe a bit of savings was more than enough to pay for a decent college degree!
This is literally what governments and regulation are for -- do things that are not profitable in the short term (ex. inventing GPS, the internet, etc) for strategic advantage.
In 10/20/30 years, the countries that do the best will be the ones with more intelligent/flexible lower and middle classes -- we can already see rapid cannibalization of industries happening on a large scale.
exactly, he's assuming everyone will declare bankruptcy if they can, which is untrue. Most people declare bankruptcy way later then they should have and suffer accordingly. People don't want to walk away from debt, they just don't have the money.
Student loans are stupid anyway. Why build this system that is basically a shadow tax. We should be able to figure out a way to pay for this and collect the funds with regular taxes.
Exactly. I started college in 2001 and while more pricey than it had been, I was able to secure loans at like 0% during school and then like 4% after. I’m not aware of the numbers for other years, but this seemed fair.
Then the loans were sold and came out at like 16%. This was painful. Not sure how that happened.
What would the effects of changing the student loan system be? I assume you mean to increase the creditor's risk to levels comparable to other types of debt. Personally, I'd expect that to result in higher interest rates for student debt, and more stringent eligibility requirements. IOW, a higher barrier to entry to education.
Maybe that would be good, it depends on how the price of education would react, and in whether a high level of education is seen as a positive or not.
If you want to make student loans more accessible, the trick is not to stimulate student loans be legalizing the loan-sharking of students. This way you are just encouraging students to take a bad deal. You are making the system more accessible by offering really bad options.
If the reasoning is "It is a good idea to have high education", then stimulate that directly. At the very least, have government-backed or government-supplied loans. And ensure those loans have reasonable terms.
I know australia has an interesting system.
In my country (the Netherlands), student loans are given by the government. They are hard to get rid of, _but_ the repayment terms are very very lenient. Very low interest rates (either 0% or the current 10 year government bond rate); a maximum monthly payment of 30% of what you make above minimum income; debt forgiveness after 30 years; the ability to pause repayment for 2 years in total.
I am not a big fan of this system (I still think it is too burdensome on students) but it sure seems a lot more reasonable than the US system. Even though this is also a form of debt that cannot be cleared by bankruptcy, the generous repayment terms really help. The trick here is that the government is willing to take a slight loss (through the 30 year debt-forgiveness) on repayments. Though that the moment, since our 10 year bonds have negative interest, the student loans might be making a profit for our government. Still I am not going to complain about a loan with 0% interest.
My daughter got a scholarship that covers her tuition 100%, so she only needed loans to cover room and board. Federal oans were still not enough to cover this, in one of the least expensive state schools.
My credit sucks and we didn't qualify for a cosigned loan to cover the extra. Luckily the school offers a reasonable payment plan and I'm taking advantage of that.
She is just living in a dorm with a standard meal plan. Between this extra out of pocket cost and the books, I can't see how a lower income family could afford college.
> My credit sucks and we didn't qualify for a cosigned loan to cover the extra.
I assume by that you mean the parent PLUS loan? Yeah, the federal loan limits outside the PLUS program are pretty low, especially for underclassmen. I don't have any statistics, but I suspect most of the Department of Education's newly-issued debt (by dollar amount) is in PLUS loans since those cover the full cost of attendance.
Do you even know anything about what you’re talking about?
A lot of student loans in the US are also backed by the government. So obviously this isn’t the solution.
Making money easier to get simply increases the “supply” (or rather, increases the buying power of the students) which basically allows colleges to keep increasing their prices with no increase in quality. If instead loans were given by private creditors, believe me, the quality (in terms of job prospects and earning potential) of the specific college and specific course that a student will study would quickly become very important. No more “social media marketing” or “feminist history” courses costing 50k per year.
What are you implying with "these policy positions are at odds with power brokers in the USA"? The politician you describe would most likely not win the popular vote because the most important voting base for most politicians is the 50+ crowd (in the US and most other Western countries) and this demographic wouldn't care too much about these issues. It's really a generational conflict.
I'm surprised #1 isn't proposed more. It's not really even that radical when you consider that the Overton window now includes completely eliminating student debt.
If you want to offer student loans to people with low incomes (as almost all students are and many of their families also are), you’re not going to be able to offer loans with traditional finance-based underwriting standards. If someone can only qualify for a pre-paid credit card or payday loan, is a lender going to step up and offer $100K+ in education loans?
I don’t want higher education open primarily to the already-wealthy. I don’t want to deny loans to students whose family will not co-sign loans for them, etc.
See my post above, that's already the case. I was able to setup a payment plan for the last part of my daughters tuition, about $100 /month. She had a scholarship for 100% of tuition and still couldn't get enough federal loans to cover room and board for the year at Purdue.
Luckily she also had some money saved for books, but there are plenty of families that couldn't afford this.
There are alternative, cheaper, forms of education. There's nothing wrong with somebody having to pay more for a better quality product or service. Using government to game the system just makes things worse for everyone (government debt, inflated prices, worthless degrees and indenture servants).
> I don’t want higher education open primarily to the already-wealthy.
I fully agree. I just think that providing cheaper capital to students (which is in effect what this enables) only has the effect of transferring more wealth from (the eventual earnings of) economically disadvantaged students, not less.
Wikipedia says "According to Overton, the window frames the range of policies that a politician can recommend without appearing too extreme to gain or keep public office given the climate of public opinion at that time."
Bernie certainly did not gain new public office in 2020. I therefore think Bernie's primary run does not demonstrate the window's shift on canceling student debt across America. Sure, he came closer in 2020 but no cigar.
So long as Bernie keeps his Senate seat, I agree that the Overton window in Vermont now includes cancelling student debt. We won't know for certain unless he is reelected there.
Thanks for pointing out the misleading headline. I double-checked your dollar value for total US mortgage debt and it’s in line with what the Fed reports. [1]
The article correctly shows that the Fed is still buying more government debt than mortgage backed securities. As of June 2020 the Fed owned over ⅕ of all US government debt and over ⅓ of longer-dated US government bonds. [2]
The article states "The Fed now owns almost a third of bonds backed by home loans in the U.S." which is where the headline comes from.
I think the reason why it's important is that owning 'mortgage backed debt' means you own an instrument sold by the mortgage underwriter rather than the mortgage itself. If the mortgage payer defaults and the underwriter fails you have no way of recovering the debt. A mortgage backed bond is tied to the actual property, so if the payer defaults you can sell the real estate to get the money back.
That might be completely wrong though. The extend of my financial education is watching The Big Short.
It is wrong, no offense. Mortgage backed debt is just a debt instrument payments from which depend on mortgage payments. It isn't debt issued by a business that has a bunch of mortgage loans on its books- those sorts of things don't exist anymore.
The mortgage industry is bewilderingly complex but short version is- most loans are almost immediately sold to Fannie or Freddie, not kept on the books of those who made them. Fannie and Freddie then securitize- make bonds out of combinations of those loans- a large portion, tho not all of loans they buy. The Fed is buying a lot of those bonds, probably generally the ones backed by the most risky payers, but the analysis is extremely nuanced.
That is why the Fed owns 1/3 of bonds, which (only) equate to 11% of total loan value. This prop on the market is much more powerful than 11% suggests.
Yes, the government absolutely controls the Federal reserve, but likes to keep it out of "politics," which is code for "please don't talk about what we're doing here, it could be used to spook the cattle."
Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country? (Assuming the acquisition process isn’t slow AF because government.)
Real estate seems like a pretty important part of the economy and, more importantly, the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies.
> Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country?
> Real estate seems like a pretty important part of the economy...
You just answered your own question. Governments do not have a history of distributing scarce resources effectively. You need various market forces.
> the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies
This is not what happens. As you said - it's artificial. Markets, like the internet, route around this sort of censorship. Any attempt to make housing artificially more affordable will have the effect of increasing demand (by design). When you increase demand, prices rise. And thus becomes unaffordable again. You can then increase the subsidies further to try to offset your original manipulation, which will only worsen the problem. This is precisely what happened in the 90s/early 00s and the result was the 2008 housing bubble.
> Governments do not have a history of distributing scarce resources effectively.
To be fair, "various market forces" also don't have the best track record of distributing resources, especially scarce ones. Somehow those always end up being "distributed" into the same few hands...
To be fair, how is that even remotely true? Look at the wealth, convenience, leisure and abundance all around you. Even people with lower income experience high standards of living. The system we have now is not without fault, but it has done better than any other before in meeting our needs and desires.
I don't understand why people make wild claims that everything is distributed to only a few hands, thats preposterous. If you really believe that, you are poisoned by ideology.
> Look at the wealth, convenience, leisure and abundance all around you. Even people with lower income experience high standards of living. The system we have now is not without fault, but it has done better than any other before in meeting our needs and desires.
You should spend some time in Appalachia if you think that's true.
There's nothing to discuss because you don't really have much of an argument. "Look around. Things are better than what they were" doesn't negate the fact that market forces are bad at distributing resources. You can look at the COVID-19 crisis as well. "Market forces" led to distribution channels with no redundancy, leaving the United States with a shortage of something super basic: PPE.
You continue to state that market forces are bad, while not paying any attention to the counterargument that they are pretty good compared to the alternatives. Making an honest comparison would be a much tedious discussion.
I'm not saying market forces are categorically bad. I'm saying they're bad at some things. Market forces are terrible at distributing housing, healthcare, and primary education. As with most things, there's a happy medium between unfettered market forces and central planning.
This is patently and simply false; if you view home ownership data worldwide, you'll see distinct patters of more home ownership in countries and localities in which the building, sale, and ownership of homes is encouraged by the government, oftentimes protecting it from the exploitative practices of capital accumulation. US home ownership is low relative to its wealth, lower than former communist blocks. Best system my ass.
That's called communism, not various market forces.
During communism, people with the only currency left - power - manage to get all the best things (which can be food, if everyone is starving, or luxury item, if people are not starving yet).
In a free market luxury items eventually become common goods.
That's why most common people have a phone, a vacuum cleaner, a
microwave, a tv.
Capitalism is like democracy: it's the worst form of economics, except for all the others. The fact that it has flaws does not make other systems superior.
Also, this thread is literally about how the housing market isn't a true market...it's a government run welfare program backed by the Fed. You're proving my point.
I'm not anti-capitalism, but markets aren't a naturally regulating thing. They need to be managed.[0] And the government plays a role in shaping to what ends those markets are managed for. E.g. if your market is allowing wealthy foreigners to buy property that then goes unused it's not a well-functioning market, regardless of how much it is aligned with "capitalism".[1]
[0]: And they are always managed. Even "free"-markets are managed, since free-markets are not a natural state, at least not for long.
[1]: Capitalism itself is a vague word that can be used to describe any number of only superficially related systems. E.g., 1800s Britain was capitalist, and had working conditions so appalling that they made Marx's ideas attractive. Modern Nordic capitalism is quite different from that, but would also still be described as capitalism (except by Democratic Socialists who know nothing about Scandinavia and are trying to convince people that those countries are actually socialist).
This thread is literally about how the housing market isn't a true market...it's a government run welfare program backed by the Fed. You're proving my point.
Because the government is a terrible market participant. It has infinite money, they suffer no consequences, and ideologues come up every so often and let their agendas take over any economic objective the program had in mind.
This is happening now more than ever with the Democrats seemingly deciding that the US Fed has the additional mandate of fighting systemic racism.
The Fed board is appointed by the President and approved by the Senate. The current chairman was appointed by Trump. The article doesn't even mention racism so I guess this is probably a throwaway culture war post but I have a hard time seeing how this of all things could be pinned on the Democrats. If anything it's the anti-public-health Republicans who let the pandemic get out of control and lead to a Fed buying spree.
I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well".
That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?
The fed can keep interest rates low; it is literally what they are doing by buying the bonds.
In principle you should see higher inflation and a falling currency. However this policy (aggressive buying of all kind of bonds) has been persued by the Europeans and Japanese for years and it haven't really caused a collapsing currency or high inflation.
Some may argue that it suspends a natural reallocation of resources in the economy. And causes the economy to keep overallocating real resources into things like real estate and finance causing bubbles, malinvestment and zoombie institutions ultimately leading to lower growth.
However that assumes that you had a free market in the first place which you never really had.
If you print money, but only give it to the top 10% who use it to prop up the stock market, does that cause inflation? I don't understand how America can pump a couple trillion dollars into the economy and it doesn't seem to have any impact. If the average person is getting any of that it should cause inflation, shouldn't it?
> If the average person is getting any of that it should cause inflation, shouldn't it?
That seems to be roughly correct. And yet, we are not seeing inflation.
The conclusion seems easy to me (perhaps too easy). The average person is not seeing much of that money being printed.
Instead, all of that money seems to be causing massive inflation in the stock market. The S&P500 and other similar indexes are incredibly high.
This is not caused by their expected cash flows growing. Instead, it is is caused by the expected returns of other money falling. Hence the expected 'time discounted cash flows' are increasing, simply because the discount rate is falling.
Or, in simpler terms, stocks prices are rising because people with a lot of money to spare need to put that money somewhere. And these people are getting a lot of extra money.
This effect is not a total waste. It should mean it becomes easier for new ventures to raise money on the markets. This could enable the creation of new businesses and innovation.
However, it could be a lot more effective to give this money to people who would do more with it than try and find a place to store it where they can still make some money of off it.
i've been following Krugman who basically says this is the case, just doesn't use the word 'inflation' in the context of the stock market - but indeed this is exactly what he's describing: free money is driving stock prices up. financial institutions don't buy food and gas, they buy financial instruments, so we don't see inflation in food and gas prices, we see inflation in stocks and t-bill yields?
There's no impact because people are sitting on cash rather than spending it.
What the Fed accomplishes by handing out the $1 trillion is this: they kept all the _other_ money circulating. If people wanted to hoard $1 trillion because they're scared about the future, well, now they've hoarded it. They feel safe and they spend the rest of their money, and the economy keeps humming along.
If instead they'd tried to hoard that $1 trillion without Fed intervention, there'd be an economic collapse.
People run corporations. When you see a round of layoffs it doesn't come out of mere cold blooded economic necessity. The leadership gets scared, and no longer feels optimistic thus they cut projects.
Sure, you can give all the money directly to the common people, but you'd end up having to do that forever since the wider economy would collapse as rich share holders first feel doubt, then have those doubts confirmed in a self fulfilling prophecy.
Common people should have non emergency sources of welfare, and governmental aid to rely on. If they don't, then the situation is aleady dire.
No, the guaranteed negative return is only if you expect rising inflation. Whether $1T in new money turns into inflation depends on what people choose to do with the new money. If they're all terrified about economic uncertainty, they won't spend the new money, and there won't be inflation.
But you're right insofar as the Fed is trying to change inflation expectations by printing money. But so far they've failed because no one believes they'll actually let inflation happen once the economy recovers. Hence Jerome Powell's recent statements about the Fed changing how it trades off inflation against economic growth. It's a way to more credibly commit to letting inflation actually happen.
Even if a bunch of people used cheap money to buy TSLA, that means a bunch of other people now have lots of money they made selling TSLA.
So someone, somewhere, is sitting on cash, which is deflationary and not what you want in a weak economy.
The cure for that problem is cheap money plus expected inflation (cheap money so people can get cash, expected inflation so they go spend it). The Fed can make money cheap, but it can't force people to expect inflation. It can do stuff to encourage that expectation, though, and yeah it's doing just that.
We spent so many years hearing it trickles down that we didn't realize how inherently backwards it really is - why would anything trickle down into actual purchases, they're always asset price pumps
Inflation for luxury goods or the types of things the 10% buys (which has some overlap with everyone else: they too, need food, housing, etc). But most households don't need more than 1 washing machine. So you gift any amount to the top 10%, but washing machine prices aren't going anywhere.
Globalization is certainly a very important factor but technology also has to be mentioned. In lots of industries it has massively reduced the bargaining power of the working people. Mostly because increasing output is much less dependent on labour than in the past.
Technology does not reduce labourers bargaining power. Legislating away workers protections, union busting, and allowing unchecked capitalism to depress wages while skimming the profits off the top and socializing the externalities reduces bargaining power.
It's really more diffuse than that. These measures drive down corporate bond yields across the board, giving them access to capital to use less wisely, or to operate in zombie mode, being unprofitable but never defaulting due to perpetually cheap debt.
The corollary of this situation is that the Fed must not allow debt rates to rise, otherwise an enormous wave of corporate defaults within a short timeframe would ensue.
This also explains why markets keep rising even when the economy is in shambles. The Fed will be a buyer of last resort for everything (the "Powell Put"). Yields are near zero for everything "safe", the money in the funds has to go somewhere, so it goes to assets like stocks and corporate bonds. Stock prices go up, bond yields go down. Corporations can get cheap debt to buy back their own stock.
Meanwhile, the Fed can act like there's no inflation because the CPI doesn't reflect these capital flows, at least not in the average. However, if you split up the CPI, you see significant inflation in some areas, whereas you see natural deflation (due to better productivity/technology) in other areas.
The individual or the mom-and-pop store indeed do not have access to this capital, they are footing the bill.
Yes it would be inflation - and you would most likely see inflation happen in only those asset purchases...
People incorrectly assume inflation means "the price of everything goes up".
Why is this incorrect assumption to make? Well because prices aren't merely dictated by supply, but rather supply & demand. Comparing inflated money supply to the total good supply is naïve, as this sort of analysis fails to consider the different demand between different goods.
As so, for a dumb example, if the FED just printed tons of money, enough to give each American $10m dollars, and each American said "I'm going to take this $10m in stimulus money, and invest it in Amazon stock", Amazon's stock price would inflate crazy! However, in this scenario meat prices wouldn't change at all, as none of this extra money spurred extra demand for meat - it only spurred demand in amazon stock...
This is predominantly why CPI is a garbage metric of inflation. It does not measure asset prices (such as stocks / real estate), and hence does not measure the inflation that is happening around us (the inflation we're seeing in assets like stocks & real estate).
And the end result is inequality. Those who own the inflated assets benefit from the inflated prices, while non-owners of the inflated assets are at a disadvantage. In this particular case, banks are benefitting from those who want to own a house, but don't already own one.
* 70% of global trade is currently denominated in USD (oil markets, commodities, etc)
* US has a lot of debt to other nations
* USD is the global reserve currency, giving the US fairly unique economic power and security
If the USD gets printed into significant devaluation in order to support assets (like bonds, houses, corporates, stocks), then it reduces the real value of the debts that the US owes to other countries (since denominated in USD), which erodes their faith as lenders. Taken together, this:
* Erodes confidence in the USD as a global reserve currency and causes governments to look to other stores of value (e.g., government buying of gold has recently been at an all-time high)
* Artificially inflates asset prices, leading to a bigger crash later when the government support is unable to continue (due to reduced confidence from foreign lenders)
That's all pretty terrible for the US and USD, if it happens.
But there's also an equally credible (though counterintuitive) theory that the USD will actually go up in value (deflation) due to every other country in the world needing to take similarly drastic action and the US being destabilized the least (i.e., the least bad of a set of bad options and everyone rushing into USD and US investments for relative safety).
Plenty of very smart people are on both sides of this argument, but everyone agrees that we are buying ourselves some significant future pain.
The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them.
Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.
> The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars.
It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods.
In any transaction, both parties are typically better off after having made the transaction, else one party would refuse.
The U.S. clearly benefits by acquiring goods, but is China really left scratching their heads with what to do with the dollars (and then throwing a dart and purchasing treasuries with their overflowing dollars)?
If China (in aggregate) is never interested in buying our goods, why would they want to compound the number of tokens that can be redeemed for future goods (by buying bonds)? Do they simply not want to buy goods now, but know they will want to in the future? Are they entirely interested only in the assets, but think the goods are not valuable, or at least not valuable for them, but maybe are for others? Doesn't that put into question the value of any assets the country might have to offer if the goods that the country provides are seemingly undesirable?
Clearly, the value the U.S. is providing can't simply be as the purchaser of a good. The U.S. is trading future obligations for current goods, and the trading partner must have some belief that they will eventually execute that option on future obligations, or trade the future obligation to someone else who will want to execute it, else this token clearly has no value.
However, I do also wonder how much of the demand of U.S. dollar is simply a system of inertia. At some point the trading partners may realize they have no interest in acquiring tokens that they will never redeem, even if this token can be compounded further for more tokens that will never be redeemed. Currently, it seems China is interested in acquiring these tokens because of the reserve currency status, as they trade with other partners in.
The other possibility is this entire narrative is incorrect, and there are other benefits to running massive trade surpluses beyond the future token redemption. Skill building could be one these benefits - the deficit trading partner (U.S.) is shaping the development of labor markets in an journeyman-like form.
> It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods.
It should strike you as odd, what you're saying is wrong.
The US exports $2.5 trillion worth of goods and services, including $1.7 trillion of goods.
The US is the world's #2 exporter of goods. With services included, the US is nearly the world's #1 exporter. In 2018, the US was behind China by only about $80 billion in total exports. That's nearly three times the #4 export country, Japan.
Of course, I'm familiar that the U.S. exports goods as well. Certainly the relationship specifically with China is one of a large and continuous trade deficit.
However, the broad intention of my previous comment is to illustrate that the narrative being that the U.S. is simply one of purchaser is lacking, or else if that narrative is correct, it will not be true for much longer once the trading partners catch on.
The same question was said about Japan in the 1980's. There was much hand-wringing over our trade deficit with Japan. (Though I had an econ professor back then who I thought put it best: "We're getting cars and they're getting pieces of paper, and somehow we're the ones getting screwed?")
The professor's quip is cute but myopic. The pieces of paper are claims on future production so the true cost is seen later.
The end result was
- American Boomers got cars
- Japanese boomers got USD
- Japanese investors then spent much of the USD on things like US real estate investment vehicles (hardly Japan only, any country that collected large amounts of USD due to trade deficit)
- American Boomers in prime markets saw tremendous returns on real estate
- and American millennials 30 years later got priced out of houses
Yes I know foreign investment is not the only cause of rapid price growth in real estate. But it is a significant contributor.
The ECB has 2x the portfolio size as a share of GDP as what the Fed does. The Bank of Japan's portfolio is about 4x the Fed on that metric.
Why isn't the Eurozone collapsing, with interest rates skyrocketing and the Euro imploding?
Somehow Japan is still managing - despite a public debt & budget situation several times worse than the US - with a GDP per capita still on par with Britain, France, and just below Germany. And yet all the armchair experts endlessly predict the demise of the US.
ECB balance of assets purchased: €2.9tn(August 2020)
Eurozone GDP: €11.9tn (2019)
So 24%
Fed balance of assets purchased: $6.3tn (September 2020)
US GDP: $21.4tn (2019)
So 29%
Even if you look at total assets on the balance sheet (Including assets purchased outright and collateralised loans), the difference is not that huge:
ECB: €4.7tn (39%)
Fed: $7.0tn (32%)
Source for ECB? FRED says they've got about 6.458 trillion euros [0] and the english version of the ECB website says they had 4.6 trillion at the end of 2019 which also matches the FRED and they haven't updated it since then [1].
Because the US is the biggest debtor in the history of humanity and is supporting (in a symbiotic relationship) all those countries you listed who are also at risk of collapsing.
Countries are buying US gov't debt because: 1) they have a lot of USD due to exporting goods to the US and 2) it's one of the safest places you can park money.
Sure, it would be bad if they dumped treasuries (at a big loss), but why would they do that if they put the money there in the first place because it was safe?
Entities buy UST because there’s a demand for it. It’s considered the risk-free asset, so when you have billions in cash, you park them in UST because you know you can get it back.
But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well.
But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake.
So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies.
Wouldn't the worst case (from the US standpoint) scenario be if the USD strengthened over time, and all these low-nominal interest loans not only had to be carried at higher real rates, but eventually come due at more than the original principal?
I don't understand what is being used as the denominator to generate this 1/3 number in the headline. A quick search shows that the US MBS market is about $10.3 trillion in size [1] - the actual mortgage market is larger (what nostromo mentioned earlier). Putting some recent numbers [2] over the size of the MBS market would show that the Fed owns a little less than a 1/5 of all US MBS.
Also, he mentions that the Fed has been purchasing roughly $100 billion per month in MBS securities since April, but this leaves out the fact that a non-insignificant number of MBS in their holdings are either i) reaching maturity, or ii) being prepaid. The second issue is more prevalent now - with the low-rate environment that exists in the US many people are refinancing their mortgages to take advantage of lower rates, but in any case it isn't uncommon for mortgages to be paid off before their maturity date. I don't know what the net figures are, but what I'm trying to say is that purchases of MBS != growth of MBS holdings.
I seriously think this author has somehow conflated the size of the SOMA assets with the size of the MBS market - continuing growth of MBS at $100 billion for the rest of the year, leaving all else equal, will give us about $2.4 trillion of MBS over a denominator of $7.4 trillion - which would give us about 1/3.
In case anyone else was wondering how this might compare to "normal":
>Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing.
>Just before this latest round, principal payments from its mortgage bond holdings had whittled that down to 21%, but it has now increased back to 30%.
More interesting than they owning 1/3 of the mortgages is what quality is the mortgages they own. Are they all sub prime quality? If they are is this a strategy to save banks from a default crisis in the near future without taking the systemic hit like 2007.
>> Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing.
8x increase over QE is crazy. Is that 8x mortgage bonds or 8x bonds in general?
US treasuries mostly in late march. Demand for dollars skyrocketed due to covid-19 and people were selling their treasuries to get dollars causing treasury yields to spike so the FED started buying $75 billion in Treasury securities per day to supply liquidity to the Treasury market and ended up buying over $1 trillion in Treasury securities within a short 3-week window.
I just refinanced my 30-year fixed mortgage for 2.5%. The rate is utterly ridiculous now. If we get even a modicum of inflation over the next few years, I will be paying negative real interest rates.
What was the term? Was it a floating rate after a lock-in period?
The thing that makes 2.5% so incredible in the US, is that it's the rate for a 30 year fixed mortgage. Get one of those loan today and you'd still be paying 2.5% interest in 2049.
I'm currently looking at various mortgage options in Belgium, between 1 and 2% for 25 year term. But what makes it even better is that, by law, (variable) mortgage rates can never more than double (in Belgium). Yearly variable mortgage rates can be had for <1%. So that means that even if it doubles in, say, 3 years, it's never more than 1.8/2%. But if interest rates remain low for years to come, I'd still get around 1% in those years (if they don't go any lower than they already are...).
I got another mortgage in the deep of the aftermath of the 2008 crisis (2010/11 or so) and I had the same situation; rates were a bit higher then. I modeled various scenarios and basically a long fixed term mortgage would only be better if rates would double after, IIRC, 3 or 4 years after I got it. Despite my instinct that screamed 'NO' at variable rate mortgages, I got one anyway - and instead of going up, rates went down, significantly (in terms of their effect on monthly payments - I'm now paying more than 10% less per month than I did at the beginning).
Much of this is completely counterintuitive. This was the first time that cold hard reasoning and financial modeling made me direct profit, and it has done so several times since, but I also have to admit that it took me years to overcome the mental blocks and feeling of uneasiness that following through with real money on decisions that are based purely on facts. I know several people who got fixed terms mortgages around the time I got my first one, and they're still happy about it, they prefer the stability - even though they rationally know there is literally no downside to the variable rate one.
All that said, the Euribor-based mortgages mentioned elsewhere where you actually get paid for having a mortgage are no longer available :)
How do negative mortgage rates even work? My brain doesn’t understand that. Does the bank make money on fees or something? -1% mortgage rate and 3% in processing fees?
Not at all. The bank is just an intermediary between the central bank and you. There are people in NL/BE/DK who actually get/got money on their mortage, monthly, just like a mortage payment but in reverse.
edit: for example, my mortage was the monthly Euribor-rate + 0.9% margin. Euribor-rate = -0.5, I pay 0.4%. But there are people who managed to get just a 0.5% margin. They pay nothing or get money back.
It’s a great time to refinance mortgage debt you already have. Whether it’s a great time to buy a house depends on the future demand for housing in the local area.
If you pay today’s price for a house in Palo Alto or condo in NYC and those areas fall in popularity, it could easily be a bad call.
Condos in NYC have fallen about 10-20% lately (at least the ones I was looking at) so even with rising rates I doubt it could go underwater once the pandemic is over
It seems quite possible that, depending on the course of the pandemic (short-term) and a related long-term evolution of remote work in finance/tech, that the footprint of highly compensated employment and demand for real estate becomes much more spread out. In a scenario like that, coupled with 8% mortgage rates, I could easily imagine a 50% haircut to high priced real estate.
That’s true. I’m skeptical we will see high rates any time soon though since that will hurt the federal government’s solvency big time. And I think there will always be demand for real estate in trendy cities. But there are definitely scenarios in which the value further decreases.
I'm hoping it's a good time to sell because I just sold mine for 3x what I paid for it 10 years ago. But there could still be a lot of inflation coming up.
IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk.
If the total Fed balance sheet is $7T, that’s 7% of their total assets that could disappear. That seems like a lot to me.
Actually, your 25% delinquency rate seems unreasonable. During the financial crisis, the subprime delinquency rate peaked at 26% [1] but the overall (whole US market) rate was just over 9%.
Delinquency is also mostly just about being a leading predictor of foreclosure or some sort of renegotiated payment structure. The same stat suggests that foreclosures overall peaked at just over 2% (but up to 15% subprime) [1 again, but also 2 which is more clear on 2.23%].
So I’d assume something closer to 2-5% foreclosure, depending on your estimates of benefits policy. Even in foreclosure, there’s still recovery (financially).
In fact, Goldman Sachs might even make a profit re-selling the mortgages it bought off of Fannie / Freddie as part of its $1.8B court-mandated “consumer relief” program [3]. It’s unlikely the Fed would be as “good” at this as Goldman, but a likely unwinding strategy would be to sell them to similar investor groups. Either way, not going to $0 :).
actually, for many metro areas the delinquency rate is reaching 25%+ for FHA loans right now. they're surviving due to the feds preventing foreclosure.
things are a little better in the other classes of loans but not much! if the economy stays weak and jobs dont come back, some metros may well see a housing price decline. Atlanta, Houston and san anton.
Sure, but the parent comment was saying they're worried the Fed will lose all the money. But the Fed is buying things broadly (initially they bought Bond ETFs/funds!), so while some places will be higher, others will be lower.
My guess is that even more than during the financial crisis, people are delinquent but would absolutely pay if they could. Was your housing price decline statement supposed to be about those homes becoming underwater and therefore the buyers walk away / end up in foreclosure?
Yeah but the Fed can just make 7.5% more money and we're back at even and it won't even be bad because they're trying to increase inflation not decrease it.
The money they’re printing isn’t being circulated because people are keeping it in their bank accounts and reducing spending. I think we’re in for something when things return to normal.
Money in bank accounts is being circulated through loans. Examples of money out of circulation are coins in a jar, rolls of twenties under the mattress, or bags of cash next to the remains of D.B. Cooper.
I think it would generally inflate housing prices. The Fed is a large buyer that can 'print' its own money to purchase these assets, so there isn't much incentive for it to examine the debt that its buying. It buys these mortgage bonds from banks that may also be incentivized not to scrutinize the people they're loaning money to (beyond whatever is required by law in underwriting a mortgage), because they know the Fed will purchase their debt without much question.
Of course, there might be other reasons and counterarguments, this is just my interpretation.
Maybe some people have discovered a money perpetuum mobile: A bank creates mortgages inflating the collateral then sells them to the Fed. The bank walks away with a surplus and the Fed explains that they are saving the economy by bailing out the bank.
We need massive govt. investment in modular housing manufacturing research with a standards consortium so that homes can click together with utilities :)
Does the fed get the interest income from those mortgages? Because if it’s not getting 100% of that interest it’s simply bailing out speculative loans by banks.
What are the rules for the fed taking on mortgages etc? I would want a max price of 80% of the value of the mortgage alongside the all proceeds portion so that banks can’t just make bad loans and then onsell them to tax payers
The Federal Reserve Board on Monday announced preliminary results indicating that the Reserve Banks provided for payments of approximately $97.7 billion of their estimated 2015 net income to the U.S. Treasury. In addition, the Federal Reserve transferred to the Treasury $19.3 billion from Reserve Bank capital surplus on December 28, 2015, which was the amount necessary to reduce aggregate Reserve Bank surplus to the $10 billion surplus limitation in the Fixing America's Surface Transportation Act (FAST Act). The FAST Act, which was enacted on December 4, 2015, requires that aggregate Federal Reserve Bank capital surplus not exceed $10 billion. The 2015 audited Reserve Bank financial statements are expected to be published in March and may include adjustments to these preliminary unaudited results.
The Federal Reserve Banks' 2015 estimated net income of $100.2 billion was derived primarily from $113.6 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, federal agency and government-sponsored enterprise (GSE) mortgage-backed securities (MBS), and GSE debt securities).
that's too simplistic. the fed has wide latitude (probably too wide), but it should correlate with the (fuzzy, hard to accurately measure/model) productive capacity/velocity of the (globalized) economy, not just an unlimited well only constrained by inflation's devaluatory noose.
moreover, considering our technological progress and trajectory, i'd love to see us revisit the idea that money can only be injected into institutions (via central banks), which was a limitation of scope imposed by the practicalities of pre-21st century life. it's also a gatekeeper's gold mine on a no longer necessary choke point. we should move towards injecting money straight into the hands that create value, not into those of middlemen like bankers.
I don't disagree with you about the role of the Fed.
But from a practical, tangible, rubber-meets-the-road, this-is-how-they-do-it point of view when the Fed buys something, it pays for it by writing a new number in my Fed account. That new number is money.
So any time the fed takes on a debt made by a business at anything other than a discount the fed is bailing out bad business decisions, and that means the taxpayer is paying for it.
If the fed just “prints money” to cover those debts the real value of the USD collapses, and that hurts individual taxpayers more than the big businesses being bailed out.
The Fed provides stability around the USD market. It deploys a wide variety of polices that attempt to manage inflation, deflation, liquidity, and overall confidence in the USD. Without this stability the USD would be significantly less valuable as a medium of trade, a store of value, and as a tool for reconciling debts.
yes, but that's why it doesn't just "print money". the fed is never going to simply print money to pay off debt because that would necessarily clobber inflation and dollar value policy. I'm not sure why people are downvoting this :-/
The way crony capitalism theft works is to look for a way to steal. The way to steal is now clear. Manufacture blow-up mortgages and they blow up on the mortgage buyers (Fed).
S&L 1980s bailouts were an exact copy of 2008 Mortgage bailouts. Theft in creating mass blow-up real estate loans. This is a proven crony capitalism way to steal.
When the Fed has to politically buy them, then crony capitalists will find a way to get them buying blow-up mortgages in 5 or 10 years.
There would be no inherent problem with having the Fed hold this much debt, if the tax system then soaked up distortions in how the resulting stimulus was distributed into the economy. That is, if the tax system is structured to pull back currency from unproductive sinks before it yields inflation, then there's no problem with the Fed holding that debt.
A better structure, as others have pointed out, would be to have the Fed just hold the government's debt, so that allocation and taxation can both be managed by the government. At the moment, the Fed and Treasury (via Congress) are both competing to play an allocating role in the economy at the same time, with no real coordination or plan.
OR...you could let nature run its curse and have those debts refinanced at real interest rates that reflected the actual production in the economy, or defaulted and have those assets and resources liberated, thus correcting the distortions which were product of the FED and the government in the first place.
Well, it all depends on what you think the purpose of an economic system is. Perhaps you'd just let the mortgage market blow up, if your only concern on this Earth was to know exactly what the market price of an asset was. But you'll have to explain to me how you think the distortions are the product of Federal Reserve and government policy, since I am not following whatever you're alluding to. The distortions I see are inherent and inevitable products of the economic system we currently have, not the product of any specific policy. In fact, these distortions seem to be the product of an absence of an adequate policy to alleviate them.
You're so right. It is clear that monetary policy isn't enough. We need Congress to step in with a real plan for fiscal policy adjustments. The Fed can just do whatever they want so they do. Congress fights to get anything moving. The issue is that this asset bubble continues to grow and near zero interest rates isn't doing anything but inflating asset prices. We need fiscal policy to start growing the GDP and we need it yesterday.
The homes around here (suburb) fly off the shelves even if prices are higher then the last bubble (~2007)... not sure what is going on. Could people be moving away from large cities because of covid-19 and remote work opportunities?
By protecting the price of real estate through mortgage purchases, the Fed is undermining the legitimacy of private property and the concept of private ownership. This is not going to end well.
This is actually a good trend. Just compare this to the alternative. San Francisco and Seattle, where the tech elite overprice the non-tech population, decimating local communities and worsening the homeless problem. Vancouver and Irvine, where Chinese elite launder money to buy real state as investments (and leave them empty) rather than living spaces, resulting in the same problem.
This all might be a silver lining of the pandemic: combined with remote work, people are no longer confined to one place - avoiding discrimination of all sorts (from real state to immigration). The truth is that if the rich are left unchecked, greed can run rampant and create more harm than good- ex: healthcare, stock bubbles.
