Housing was out of reach for many Americans before interest rates went up. I don't think allowing an escape to mortgage rate lock-in is a bad idea, but state and municipal funding and financing and zoning reform would make more of a difference in the housing market.
this post was submitted on 29 May 2024
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Or probably just do both.
Yes please!
I doubt it'd fix the housing crisis here, but it would certainly help. I'm not sure how many people would warm up to it, though. A large part of our problem is that there isn't any affordable housing. The fact the average house cost in 2023 was around $450,000 is insane, especially given the median income in the US was roughly $75,000 in 2022.
So yes, being able to buy back our mortgage's bonds at their market value may be a boon, but the fact that the Dane's require at least 20% down for their system to work would be a nonstarter for so many people. Roughly 65% of Americans are living paycheck to paycheck. A small minority of people are going to have the ~$80,000 to required to put down on a $450,000 house. Ultimately, turning housing into such a profitable investment option has led us to this situation, as having fewer houses means the existing houses are worth more and will only increase in value, making it a much more attractive investment than building new housing en masse.
require at least 20% down for their system to work would be a nonstarter for so many people.
That's not really how it works, though. You actually only have a to put down 5 percent or more in Denmark. Much like the US.
The difference is that, in Denmark, the mortgage (the loan with the covered bond) can only finance 80 percent of the value, the rest can be financed by a regular bank loan. So 80 percent mortgage and 15 percent bank loan.
I was going off of the article, which stated that 20% is required in Denmark. Seems that they didn't specify that well, so I apologize for the ignorance.
No worries. The article isn't clear on that.
The point of requiring 20% is to suppress demand, pushing prices down toward affordability.
The down payment requirements were introduced in the 2010s, because too many people got their fingers burned on rate free loans. Prior to that it was possible to make a mortgage of 100% of the capital and no rate payment for 10 years, in which buyers only had to pay interest which was around 6% at the time or variable between 2-4% or so.
It obviously broke when the 10 years were up and people had to "suddenly" pay both rates and interest on way too large loans. The banks had expected people to refinance before that and were gladly passing out unrealistically large loans.
It was crazy beforehand. You could walk broke and unemployed into a bank and get approved for buying houses worth millions, because you didn't have to prove any kind of income except for covering the interest for the next month.
The down payment requirement forced the banks not to pass out these "free" loans to people without money. Not only should people be able to stomp up some cash, it also requires the bank to participate in the risk that they sell.
Now more currently, this up-conversion rage is something else. It can free up cash, right? Sure, but it makes the most sense if the customer has more expensive debts to be covered by that "free" liquidity. Like the bank loan? So that's why the banks have been pushing it well out of what is reasonable. Yes, there were money to be made for a small window in 2022, but by the time your bank advices you to do it, you can bet that it is well past the good deal. For customers, it only makes sense in the long run if you can close more expensive loans or desperately need liquidity for perhaps buying a more expensive house, and don't mind pushing the payments ahead into the future where you will "obviously" make soo much more money.
Personally I have converted my loan two times, but only downwards from 4% to 2.5% to 1%. I skipped the lowest offer of 0.5% because the savings didn't cover the costs of doing it. I will be happily "locked in" on my 1% mortgage until I sell this house. Refinancing might free up cash, but it doesn't balance in the long run. I'd basically be paying myself back for taking out that cash now, while the bank would take out their part right away.
This sounds good, but I don't fully grasp the covered loan aspect. So the bank is required to sell a matching bond on the open market. What's the difference between the rate on mortgage and the rate on the on bond? Is it also matched or just the principal? Does that make the interest a wash for the bank, so that their primary motivator is fee collection?
Here's an in-depth comparison between the US and Danish mortgage models. It's a PDF from the NY Fed:
Oh actually, it's not working. Idk
We don't have enough homes we are millions of homes short. There is no solution until building goes into over drive.
The number of empty houses in North America is absurd. Zoning and regulatory structure are as much an issue as construction.
Not everyone needs to own a home. If rental rights were stronger and we didn’t have STR’s owned by private equity firms gobbling up real estate and driving up prices then we’d likely see a much more sustainable mix of rental and ownership available to everyone. The one positive thing about current interest rates is it’s scaring folks away from investment properties.
Obviously this varies from city to city but it is definitely a consistent issue in many major cities.
Maybe, but that doesn't really have anything to do with what the article is covering.
It’s a multi-faceted problem, I am just discussing a major part of the issue as it relates to the US housing market. It’s a piece of the discussion. I mean the opening of the article is about how interest rates influence buying and provide certainty to buyers. The whole thing is about the market cooling which impacts everyone.
The nice thing about owning a home is that you actually build up your saving. If you at some point get in hot waters you can sell your home to get some backup cash.
In a healthy housing market, there's enough competition that renting is much cheaper than buying. Indeed, I remember it being that way when I was a kid. Over the course of my life, landlording went from something that retired people did for a very small additional income stream to a get rich quick scam.
This.
15 years ago, wifey and I talked of selling our home, renting (turnkey), and living off/investing the remaining equity.
Today? Let's just say that "the best laid plans something something...."
As a boomer, one of the biggest "flaws" I see in this irl, is that people won't sell their shit, and their dreams die in their sleep, with them.
Yea, that's true. But I would say that is still better then forking over money into the rent furnace each month right?
You’re forking over interest into the furnace each month as well as home insurance and property taxes. My escrow is higher than my principal. As a renter you have none of these costs.
When interest rates are low and you lock one in, yes, owning a home can be very economical. But just owning one is not always better. A lot of it depends on if you are solo or have a family as well.
It must be different in different places. I went from a renter in one area, to an owner in the same area, to a renter again in a different area in the period of 5ish years (long story).
Rent in the first area was about the same cost for a two bedroom, two bath, 1000 sq ft apartment as the entire mortgage on a 3 bedroom, 2 bath, 1200 sq ft house, including principle, interest, and taxes. The only reason people would rent there is because they don't have the money for a down payment.
When we left that area, we could have become landlords and rented the house out. We could have easily gotten twice the entire mortgage in rental income, but we felt that being a landlord was unethical (especially since we were relatively wealthy for that area, although we made less than the US median family income). We sold the house and broke even.
Now, we live in a much higher COL area. It's true here that renting is much cheaper than buying, but that's because you can't get a SFH for less than about $1.5 million here. My rent on my 1 bed, 1 bath, 700 sq ft apartment is more than twice my mortgage in my previous area. Our incomes have increased, now we make slightly above the median family income. But our leftover at the end of the month honestly went down a ton. If we weren't here to get an education, we'd be gone by now.
Just saying.... As someone who has both rented and owned, I definitely feel more like I'm shoveling money into a fire as a renter. Owning was the best financial situation I'd ever been in.
So I’m going to change the numbers but keep the ratios the same here.
I paid $100/mo as a renter for me and my wife. Our first house cost $200/mo not including home insurance, things like HVAC/termite/pest contracts, annual repairs, etc. Our house is definitely bigger but if I adjust for sqft (same neighborhood so that’s accounted for) our rent would’ve been about $140/mo. But after that, it’s just utilities. Not even appliances.
The benefit of the house was a fair bit went towards principal but for most fixed rate 30yr mortgages even at a great interest rate, you’re paying more than half into interest when you pay your mortgage every month until about year 9 or 10. That interest is money completely lost, no value for you. And if the market goes downward, you can lose money on the sale or at the very least eat away at your investment.
I am not saying in the long run owning is not advantageous. But there is a lot to consider especially when historic interest rates are no longer available that can make renting the superior option. Especially if it is just one or two people living together.
Sure but as a renter you aren’t responsible for upkeep/changes to the home so you can also squirrel away more in a more reasonable market.
as a renter you aren’t responsible for upkeep/changes to the home
Nobody likes big unexpected costs. That’s why landlords tend to offload the risk to PMCs, warranties, and insurance.
And then your rent pays for the monthly costs of all of that.
That would be true of landlords didn't also know that and, in turn, redline rent to the maximum tenants can possibly pay.
I don't know about the US specifically, but In Canada, investors big and small have bought up all the rental stock and rents are now maxed out beyond what many people can pay.
Big rental companies/STR companies and PE firms that also dabble in both drive up the cost of neighborhoods far more than typical landlords. Landlords are usually an issue for driving the value of a building down due to refusal to fix anything that isn’t absolutely about to kill someone - and even then they often don’t until an assessor or someone identifies it and makes threats.
Don’t get me wrong, landlords are an issue too. But my first comment I said renters need more rights. That’s me saying they need protection from greedy/negligent landlords as well.