This isn't about 30-year mortgages in the general case, this is about the US specifically, where a fixed-rate 30-year mortgage is typical, with a good rate and no early repayment penalty.
And yes it's insane, because if rates go up you leave it alone and if rates go down you remortgage at a lower rate.
Isn't the alternative less home ownership and less growth in quality of life? Didn't all of those programs increase demand which made people homeowners?
There are a number of reasons why homes are expensive today and it's not just "social programs bad".
By all means I can imagine the 30-year fixed loan could be driving up prices of the land itself (the lots). There is of course a non-trivial cost for materials and labor, below which you would never expect see the price of a new home fall.
I suspect though, for better or worse, if we had to pay cash for a home, builders would simply be putting up inexpensive mobile-home style houses on tiny lots. Suburbia would look very different from what it looks like today.
It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
>I suspect though, for better or worse, if we had to pay cash for a home, builders would simply be putting up inexpensive mobile-home style houses on tiny lots. Suburbia would look very different from what it looks like today.
There are other kinds of loans and different terms too.
>It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
The cheap credit drives up home prices. It's not actually an obvious aid to poor people. It discourages saving up for a house. Higher interest rates would drive prices down and make down payments easier to save up.
Home prices do have a demand side component to pricing…but making it easier to add supply at lower cost is by far the best way to address housing issues.
Most importantly: as a society we can either encourage homeownership as a good investment (appreciating faster than inflation) or have more affordable housing (prices decreasing or increasing less than inflation). There is no way to have both at a large scale. I believe affordability is a better goal, there are many other ways to store wealth.
A tangential note - U.S. Federal Housing agency (FHFA) is currently led by William J. Pulte, who is the grandson of the founder of PulteGroup, one of the largest residential home construction company [ https://en.wikipedia.org/wiki/Bill_Pulte ].
The author claims that 30 year mortgages are a "scam" like student loans. Student loans are a scam because they are not dischargeable even in bankruptcy proceedings; this distorts the true cost of student loans. They are financial millstone for life. Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
>Student loans are a scam because they are not dischargeable even in bankruptcy proceedings; this distorts the true cost of student loans.
That doesn't make them a scam. These loans are highly unnatural and issued to young people with no credit history and no definite plan to ever repay. If you let people go bankrupt on them, they would max the loans out and default almost immediately.
>Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
That is the worst that can happen for a borrower IF they qualify for Chapter 7. These loan defaults are damaging to society as well. Even when the banks get the houses back, they lose at least tens of thousands on each one in the process of selling them.
I really do not understand the arguments of this article (or the libertarians in the comments complaining about it). It is so vague it offers little benefit to the discussion. The article makes it seem like the government pays a direct subsidy for mortgages. The GSAs do not do that; it insures the 30 year loans to provide market stability and makes money with guaranty fees. Just FDIC and NCUA insurance on private deposits-it is self funding and provides a positive to the market-stability. Same for FHA. This is exactly what the government should do. Private actors otherwise would have to find their own insurance and cyclical changes in the market would likely to higher fees to manage it than what the government is offering.
Nor does the article talk about the direct subsidies because it is very unpopular and the paper may lose readers. Like the mortgage interest deduction or VA loans.
Also, the paper picks out 30 year mortgage loans but leaves out other government incentives; like Trump's recent 20% tax deduction on non-owner operated business income... which really can only be claimed by a REIT as far as I know?
I specifically point out REITs as REITs led to their own share of property speculation.
The government benefits from these mortgages as it helps it develop underdeveloped regions in the nation-allowing them to reach that critical mass to support modern infrastructure and grows the middle class through home ownership. Your views on a community change when you have a decade of your wages invested in a part of that community.
My speculation is some think tank paid from the wealthy is paying for articles to find ways to raise revenue to keep the Trump tax cuts for the wealthy.
Like eliminating Depression Era regulations have worked so well. Savings/loan crisis, 2008 housing crashes, Enron to name a few helped along by removing or tweaking these regs.
>In response to higher prices, lenders gradually extended terms, lowered down payments
That is because of elimination Regulations. I remember a person had to put down 20% in order to buy a house. Also the loans were written by a local Savings and Loan Bank or a Credit Union. These loans were not sold to a Wall Street but funded locally and used to improve the local area.
>In the 2000s the game was in full swing: subprime, adjustable-rate, interest-only and no-money-down loans flooded the market
Fixed rate mortgages create a problem for central banks trying to control inflation. Raising interest rates has an outsized impact on a small number of people rather than spreading the pain across all mortgagees.
The title is misleading. You need to read the whole article to understand what the author actually criticizes: the subsidies. As one of the commenters to the original article noted, this point is not to solid when you look at European markets with no subsidized mortgages where you have to pay floating rate instead of fixed one or the fixed one is for much shorter periods.
A very strange article TBH. A lot of truisms and emotional statements with the lede buried and no spelled out solution. I mean, we can all agree that working one's whole life just to have a place to live is crazy, but it's not what the article is really about, despite repeating this thing a few times.
Is it still ok to buy a home with a 30y loan? Yes.
However, as your career (hopefully) grows and you earn more, plus inflationary aspects of time, eventually you want to be in a spot to refinance your 30y loan into a 15y or 20y one (and hopefully before the half way point!).
I was able to refi a 30y loan about six years into it into a 15y thanks to low Covid rates, and while I only pay a few hundred more per month I went from maybe $6,000 a year in principal and $8,000 in interest to $14,000 a year in principal and $5,000 a year in interest. “Throwing away” a lot less money in interest payments is good for your net worth.
No surprise this is written by a conservative think tank guy with a focus on an economic policy agenda. Stay tuned for "actually, the NLRA is bad for workers" and "really everybody should have the right to work at a business that doesn't meet OSHA requirements" and "your 401k depends on stock prices, so don't you dare raise the corporate tax rate."
I very sorry that banks lose out when somebody gets a fixed rate mortgage and then rates rise. "If only everybody had adjustable rate mortgages" doesn't seem like a win to me.
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[ 3.1 ms ] story [ 42.3 ms ] threadAnd yes it's insane, because if rates go up you leave it alone and if rates go down you remortgage at a lower rate.
That said, it seems like the article buried the lede and is really complaining about interest costs.
There are a number of reasons why homes are expensive today and it's not just "social programs bad".
I suspect though, for better or worse, if we had to pay cash for a home, builders would simply be putting up inexpensive mobile-home style houses on tiny lots. Suburbia would look very different from what it looks like today.
It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
There are other kinds of loans and different terms too.
>It also seems likely that if the 30-Year Fixed went away, only the truly wealthy would be able to buy homes … to rent to the rest of us of course.
The cheap credit drives up home prices. It's not actually an obvious aid to poor people. It discourages saving up for a house. Higher interest rates would drive prices down and make down payments easier to save up.
Most importantly: as a society we can either encourage homeownership as a good investment (appreciating faster than inflation) or have more affordable housing (prices decreasing or increasing less than inflation). There is no way to have both at a large scale. I believe affordability is a better goal, there are many other ways to store wealth.
The author claims that 30 year mortgages are a "scam" like student loans. Student loans are a scam because they are not dischargeable even in bankruptcy proceedings; this distorts the true cost of student loans. They are financial millstone for life. Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
That doesn't make them a scam. These loans are highly unnatural and issued to young people with no credit history and no definite plan to ever repay. If you let people go bankrupt on them, they would max the loans out and default almost immediately.
>Meanwhile, with a mortgage, the worst that can happen is Chapter 7 liquidation. You lose the house but are no longer liable.
That is the worst that can happen for a borrower IF they qualify for Chapter 7. These loan defaults are damaging to society as well. Even when the banks get the houses back, they lose at least tens of thousands on each one in the process of selling them.
Nor does the article talk about the direct subsidies because it is very unpopular and the paper may lose readers. Like the mortgage interest deduction or VA loans.
Also, the paper picks out 30 year mortgage loans but leaves out other government incentives; like Trump's recent 20% tax deduction on non-owner operated business income... which really can only be claimed by a REIT as far as I know?
I specifically point out REITs as REITs led to their own share of property speculation.
The government benefits from these mortgages as it helps it develop underdeveloped regions in the nation-allowing them to reach that critical mass to support modern infrastructure and grows the middle class through home ownership. Your views on a community change when you have a decade of your wages invested in a part of that community.
My speculation is some think tank paid from the wealthy is paying for articles to find ways to raise revenue to keep the Trump tax cuts for the wealthy.
Like eliminating Depression Era regulations have worked so well. Savings/loan crisis, 2008 housing crashes, Enron to name a few helped along by removing or tweaking these regs.
>In response to higher prices, lenders gradually extended terms, lowered down payments
That is because of elimination Regulations. I remember a person had to put down 20% in order to buy a house. Also the loans were written by a local Savings and Loan Bank or a Credit Union. These loans were not sold to a Wall Street but funded locally and used to improve the local area.
>In the 2000s the game was in full swing: subprime, adjustable-rate, interest-only and no-money-down loans flooded the market
Again, regulations were eliminated to allow this.
Sorry, I am done reading this crazy article :)
A very strange article TBH. A lot of truisms and emotional statements with the lede buried and no spelled out solution. I mean, we can all agree that working one's whole life just to have a place to live is crazy, but it's not what the article is really about, despite repeating this thing a few times.
Are 30y loans bad? Yes.
Is it still ok to buy a home with a 30y loan? Yes.
However, as your career (hopefully) grows and you earn more, plus inflationary aspects of time, eventually you want to be in a spot to refinance your 30y loan into a 15y or 20y one (and hopefully before the half way point!).
I was able to refi a 30y loan about six years into it into a 15y thanks to low Covid rates, and while I only pay a few hundred more per month I went from maybe $6,000 a year in principal and $8,000 in interest to $14,000 a year in principal and $5,000 a year in interest. “Throwing away” a lot less money in interest payments is good for your net worth.
I very sorry that banks lose out when somebody gets a fixed rate mortgage and then rates rise. "If only everybody had adjustable rate mortgages" doesn't seem like a win to me.