Mortgage Payments should be Indexed to the Value of the Home

[JayhawkCO]

And reduce by 75% the amount of people willing to build a house since they wouldn't have any idea how much it would cost in five years.

The only thing that's certain in life is death and taxes. By taking away much of the potential profits from speculation, this type of mortgage should dampen changes in home prices.

Why is that a good thing? I'm not exactly a capitalism absolutist, but appreciation in and if itself is not something to avoid.

It is something to avoid if you're a first time homebuyer who doesn't have an existing house to sell at an inflated price to finance the purchase of another one.

While I understand that home ownership is a large contributor to the wealth gap, there are plenty of places in the country where you can move and be able to afford a house if that's what you want to do.

And there's nothing "inflated" about the price. Prices change based on market conditions. Sometimes the prices of homes go down, too. My house is down about $40k from its peak value in 2021.

[1995hoo]

I find it annoying enough under the existing system when the mortgage payment goes up because of real estate tax, which in turn raises the escrow payment. Over the years I've figured out how to come close to estimating what the new escrow amount is likely to be and then making a lump payment in advance to minimize the increase in the monthly amount, but it's almost impossible to avoid some sort of increase except in a year when the real estate assessment decreases—which has happened exactly once and the monthly payment dropped by $21 that year. (I kept on paying the same amount anyway—reduce the outstanding principal.)

My house's assessed value has gone up by about $460,000 since I bought it, although most houses around here sell for more than the assessment such that the current assessment is likely a bit low. Why should the mortgage company be entitled to anything more than the interest I contracted to pay them when I took out the loan? If the payment had shot up just because of a hot real estate market, I'd have lost the house in 2009 when I was out of work for a while and living off money I had saved up at my previous job.

... In 30 years a lot changes; the general price level rises thanks to inflation, your earnings increase the longer you're in the workforce, ....

The boldfaced is an unwarranted assumption.

[kernals12]

The current system is rather one-sided. If a borrower is underwater and gets foreclosed on, they still owe the difference between the sales price and the value of the loan, but it is extremely unlikely that the borrower will ever be able to pay that debt. On the other hand, if the sales price is higher than the value of the loan, the borrower gets to pocket the surplus. This asymmetry means all borrowers have to pay a higher interest rate.

[kernals12]

If the payment had shot up just because of a hot real estate market, I'd have lost the house in 2009 when I was out of work for a while and living off money I had saved up at my previous job.

Your being laid off was likely connected to the recession that happened that year due to the collapse of the housing market. In this counterfactual world, your mortgage payments would've gone down, giving you more money to spend just when you needed it most. Economists would call this a "countercyclical effect" as it dampens the impact of economic swings.

[michravera]

And reduce by 75% the amount of people willing to build a house since they wouldn't have any idea how much it would cost in five years.

The only thing that's certain in life is death and taxes. By taking away much of the potential profits from speculation, this type of mortgage should dampen changes in home prices.

Why is that a good thing? I'm not exactly a capitalism absolutist, but appreciation in and if itself is not something to avoid.

... and it wouldn't achieve the stated goal. The super-rich, who can afford to speculate and pay cash, would simply buy low and sell high to someone who would be willing to accept an indexed mortgage scheme. The only way to keep people from speculating is to ban private ownership (in which case the commune is speculating). If that happens, no one is building (or even maintaining) houses, except under the threat of the whip. -- Next Idea?!

[Max Rockatansky]

That's what my brother did in Indianapolis.  I kept calling him a slim lord for years after he sold.  Can't deny the fact that he made some money off of, even though it was a questionable act.

If they have some insight into the future and can see an area that may gentrify, they can make some money.  But in the meantime, they just hope their asset isn't destroyed.

In his case the angle was renovation (involving eviction) which led to gentrification.  It actually worked too given it was a downtown area.  He asked if I was interested in investing in it but wasn't my bag. 

[Max Rockatansky]

And reduce by 75% the amount of people willing to build a house since they wouldn't have any idea how much it would cost in five years.

The only thing that's certain in life is death and taxes. By taking away much of the potential profits from speculation, this type of mortgage should dampen changes in home prices.

Why is that a good thing? I'm not exactly a capitalism absolutist, but appreciation in and if itself is not something to avoid.

It is something to avoid if you're a first time homebuyer who doesn't have an existing house to sell at an inflated price to finance the purchase of another one.

While I understand that home ownership is a large contributor to the wealth gap, there are plenty of places in the country where you can move and be able to afford a house if that's what you want to do.

And there's nothing "inflated" about the price. Prices change based on market conditions. Sometimes the prices of homes go down, too. My house is down about $40k from its peak value in 2021.

The house I owned during the pre-bubble era had a county assessed value of $575,000 in 2007.  Just last year it reached the approximate same numeric value.  It would need to be valued at approximately $866,000 to pace the value it had in 2007 with inflation factored.

[SectorZ]

Kernals did you go to BU by chance? It just sounds like something you would learn in their econ dept.

[kernals12]

Kernals did you go to BU by chance? It just sounds like something you would learn in their econ dept.

Umm, procyclical and countercyclical policies are a very fundamental element of orthodox economic study.

[GaryV]

Suppose you got a new 30 year mortgage with a $2000 payment (principal and interest only for this illustration - taxes and insurance are extra).

Somewhere around $1800 of that payment would go toward interest.

Now suppose you have a reduced payment in the early years of the mortgage, paying more in later years. So you pay $1700 per month.

You would be going $100 in the hole each month! Your payments wouldn't even cover the interest, so your principle would be going up. What bank would gamble on that, knowing that not until some time in the future would you end up paying enough to cover the cost of the original loan? And that assumes that both your house value and your income continue to rise. Clearly not the case for everyone.

[kalvado]

Suppose you got a new 30 year mortgage with a $2000 payment (principal and interest only for this illustration - taxes and insurance are extra).

Somewhere around $1800 of that payment would go toward interest.

Now suppose you have a reduced payment in the early years of the mortgage, paying more in later years. So you pay $1700 per month.

You would be going $100 in the hole each month! Your payments wouldn't even cover the interest, so your principle would be going up. What bank would gamble on that, knowing that not until some time in the future would you end up paying enough to cover the cost of the original loan? And that assumes that both your house value and your income continue to rise. Clearly not the case for everyone.

I assume the idea is that things are close to rent-to-own where asking for, say, 5% of building cost annually is reasonable.
Probably scaling principal amount to market conditions is assumed as a basis.

[kernals12]

Suppose you got a new 30 year mortgage with a $2000 payment (principal and interest only for this illustration - taxes and insurance are extra).

Somewhere around $1800 of that payment would go toward interest.

Now suppose you have a reduced payment in the early years of the mortgage, paying more in later years. So you pay $1700 per month.

You would be going $100 in the hole each month! Your payments wouldn't even cover the interest, so your principle would be going up. What bank would gamble on that, knowing that not until some time in the future would you end up paying enough to cover the cost of the original loan? And that assumes that both your house value and your income continue to rise. Clearly not the case for everyone.

It is the case for almost everyone, and that's what matters to lenders.

And financial institutions regularly "gamble" in far riskier ways than this.

[SectorZ]

Kernals did you go to BU by chance? It just sounds like something you would learn in their econ dept.

Umm, procyclical and countercyclical policies are a very fundamental element of orthodox economic study.

If you can't dazzle them with genius, then baffle them with bullshit.

[Bobby5280]

This notion of indexing mortgage payments based on assessed value is nuts. It sounds as bad or maybe even worse than signing up for an Adjustable Rate Mortgage (ARM). Anyone would have to be eating stupid pills by the fist full if they wanted to finance a home with a ARM and actually live in the home for any long term amount of time (as opposed to renovating and flipping the thing).

The nice thing about a traditional 30 year fixed rate mortgage is the payments get easier to make through the years due to dollar inflation and one's own earnings increases. Hopefully those gains aren't offset by onerous hikes in property taxes.

For all the schemes going on to game the residential real estate market, a bunch of this crap can go on for only so much longer. The US is in a very absurd housing price bubble. Some market experts are trying to insist this is the new normal, but it is mathematically NOT sustainable. 70% of our economy is driven by consumer spending. When you have low income and middle income people spending 50%, 60% or 70% of their incomes on mortgage payments or rent it leaves very little money left over to buy stuff. Some warning signs are already present with certain dollar store chains failing and companies like McDonald's reporting serious downturns in customer traffic. That economic rot happening at the bottom always has a nasty way of working itself upward.

With the US residential real estate market currently being used as an investors playground it's possible for this bad math situation in home mortgage/rent prices to continue for years to come. But it's just going to delay consequences that will be far worse and inflict economic pain that will last for many years. These investors and policy makers have created conditions ripe for the United States to have an utter collapse of fertility rates and just crater our nation's future demographics. In the US only 25% of adults aged 30 and younger have 1 or more children. That number was 60% back in the 1990's. The decline can get a lot worse. Tens of millions of young adults are being priced out of parenthood. America's divorce rate is falling, but that's only because fewer people are getting married.

What do falling birth rates and demographic decline have to do with this topic? Every person who buys a home has the thought in his head that he'll be able to sell it and sell it for a profit sometime in the distant future. What are these home owners and investors going to do when they don't have any buyers?

I don't live in a high income city, but all the new homes getting built here on the far East and West sides of Lawton are big homes for people with six figure incomes. Nearly all the buyers are middle-age and retired-age people. 20 years from now those same homes might be sitting empty. What would a single unmarried person with no kids need with a 3000 square foot McMansion that comes with 3000 square foot utility bills and 3000 square foot property taxes? We have a massive shortage of small houses for single people or couples without kids. And it's hard to build those kinds of houses anywhere thanks to zoning politics. That's yet another thing that's eventually going to kill a generation worth of home ownership and make our emerging baby bust all that much worse.

[SEWIGuy]

The current system is rather one-sided. If a borrower is underwater and gets foreclosed on, they still owe the difference between the sales price and the value of the loan, but it is extremely unlikely that the borrower will ever be able to pay that debt. On the other hand, if the sales price is higher than the value of the loan, the borrower gets to pocket the surplus. This asymmetry means all borrowers have to pay a higher interest rate.

Yes. The risk is on the buyer. If you don't want to deal with that risk, you can always rent.

[SEWIGuy]

This notion of indexing mortgage payments based on assessed value is nuts. It sounds as bad or maybe even worse than signing up for an Adjustable Rate Mortgage (ARM). Anyone would have to be eating stupid pills by the fist full if they wanted to finance a home with a ARM and actually live in the home for any long term amount of time (as opposed to renovating and flipping the thing).

The nice thing about a traditional 30 year fixed rate mortgage is the payments get easier to make through the years due to dollar inflation and one's own earnings increases. Hopefully those gains aren't offset by onerous hikes in property taxes.

For all the schemes going on to game the residential real estate market, a bunch of this crap can go on for only so much longer. The US is in a very absurd housing price bubble. Some market experts are trying to insist this is the new normal, but it is mathematically NOT sustainable. 70% of our economy is driven by consumer spending. When you have low income and middle income people spending 50%, 60% or 70% of their incomes on mortgage payments or rent it leaves very little money left over to buy stuff. Some warning signs are already present with certain dollar store chains failing and companies like McDonald's reporting serious downturns in customer traffic. That economic rot happening at the bottom always has a nasty way of working itself upward.

With the US residential real estate market currently being used as an investors playground it's possible for this bad math situation in home mortgage/rent prices to continue for years to come. But it's just going to delay consequences that will be far worse and inflict economic pain that will last for many years. These investors and policy makers have created conditions ripe for the United States to have an utter collapse of fertility rates and just crater our nation's future demographics. In the US only 25% of adults aged 30 and younger have 1 or more children. That number was 60% back in the 1990's. The decline can get a lot worse. Tens of millions of young adults are being priced out of parenthood. America's divorce rate is falling, but that's only because fewer people are getting married.

What do falling birth rates and demographic decline have to do with this topic? Every person who buys a home has the thought in his head that he'll be able to sell it and sell it for a profit sometime in the distant future. What are these home owners and investors going to do when they don't have any buyers?

I don't live in a high income city, but all the new homes getting built here on the far East and West sides of Lawton are big homes for people with six figure incomes. Nearly all the buyers are middle-age and retired-age people. 20 years from now those same homes might be sitting empty. What would a single unmarried person with no kids need with a 3000 square foot McMansion that comes with 3000 square foot utility bills and 3000 square foot property taxes? We have a massive shortage of small houses for single people or couples without kids. And it's hard to build those kinds of houses anywhere thanks to zoning politics. That's yet another thing that's eventually going to kill a generation worth of home ownership and make our emerging baby bust all that much worse.

Birthrate declines will be more than made up by net immigration.

[michravera]

The current system is rather one-sided. If a borrower is underwater and gets foreclosed on, they still owe the difference between the sales price and the value of the loan, but it is extremely unlikely that the borrower will ever be able to pay that debt. On the other hand, if the sales price is higher than the value of the loan, the borrower gets to pocket the surplus. This asymmetry means all borrowers have to pay a higher interest rate.

Yes. The risk is on the buyer. If you don't want to deal with that risk, you can always rent.

That's actually not true, in California and other "Title Theory" states.

[jeffandnicole]

Suppose you got a new 30 year mortgage with a $2000 payment (principal and interest only for this illustration - taxes and insurance are extra).

Somewhere around $1800 of that payment would go toward interest.

Now suppose you have a reduced payment in the early years of the mortgage, paying more in later years. So you pay $1700 per month.

You would be going $100 in the hole each month! Your payments wouldn't even cover the interest, so your principle would be going up. What bank would gamble on that, knowing that not until some time in the future would you end up paying enough to cover the cost of the original loan? And that assumes that both your house value and your income continue to rise. Clearly not the case for everyone.

This is a fairly good, simple website to calculate the amortization schedule, which allows you to look at just principal & interest if you knock down the other rates, taxes & fees to 0. https://www.amortization-calc.com/mortgage-calculator/

[SEWIGuy]

The current system is rather one-sided. If a borrower is underwater and gets foreclosed on, they still owe the difference between the sales price and the value of the loan, but it is extremely unlikely that the borrower will ever be able to pay that debt. On the other hand, if the sales price is higher than the value of the loan, the borrower gets to pocket the surplus. This asymmetry means all borrowers have to pay a higher interest rate.

Yes. The risk is on the buyer. If you don't want to deal with that risk, you can always rent.

That's actually not true, in California and other "Title Theory" states.

What does Title Theory mean?

[Bobby5280]

Birthrate declines will be more than made up by net immigration.

This nation might not be able to take the immigration factor for granted much longer.

For the past 50 years all of America's net increases in population have been made possible by immigration. In the early 1970's the total fertility rate of American-born women of all races fell to an average near 2.1 children per female, which is equal to the replacement level. TFR hovered near that level until the mid 2000's and has been steadily dropping since. Immigrants who come to America now are also having fewer children.

Currently there is a lot of anti-immigrant hysteria present in our country. The possibility of mass deportations following the November election could dramatically reduce all types of immigration. The free and open nature of our society helps attract a great deal of high skilled legal immigrants. If America's government turns into a dictatorship of some type that sort of immigration will be greatly reduced. Finally, if America's economy tanks itself that will also reduce immigration. A bunch of this nation's wealth is tied up in the housing market. If future generations are suddenly much smaller that will lead to a far smaller pool of future home buyers.

[SEWIGuy]

Birthrate declines will be more than made up by net immigration.

This nation might not be able to take the immigration factor for granted much longer.

For the past 50 years all of America's net increases in population have been made possible by immigration. In the early 1970's the total fertility rate of American-born women of all races fell to an average near 2.1 children per female, which is equal to the replacement level. TFR hovered near that level until the mid 2000's and has been steadily dropping since. Immigrants who come to America now are also having fewer children.

Currently there is a lot of anti-immigrant hysteria present in our country. The possibility of mass deportations following the November election could dramatically reduce all types of immigration. The free and open nature of our society helps attract a great deal of high skilled legal immigrants. If America's government turns into a dictatorship of some type that sort of immigration will be greatly reduced. Finally, if America's economy tanks itself that will also reduce immigration. A bunch of this nation's wealth is tied up in the housing market. If future generations are suddenly much smaller that will lead to a far smaller pool of future home buyers.

There will not be "mass deportations" no matter who wins in November. And there will still be plenty who want to come here.

[Max Rockatansky]

How the fuck did dictatorships get into the conversation?

[kalvado]

Birthrate declines will be more than made up by net immigration.

This nation might not be able to take the immigration factor for granted much longer.

For the past 50 years all of America's net increases in population have been made possible by immigration. In the early 1970's the total fertility rate of American-born women of all races fell to an average near 2.1 children per female, which is equal to the replacement level. TFR hovered near that level until the mid 2000's and has been steadily dropping since. Immigrants who come to America now are also having fewer children.

Currently there is a lot of anti-immigrant hysteria present in our country. The possibility of mass deportations following the November election could dramatically reduce all types of immigration. The free and open nature of our society helps attract a great deal of high skilled legal immigrants. If America's government turns into a dictatorship of some type that sort of immigration will be greatly reduced. Finally, if America's economy tanks itself that will also reduce immigration. A bunch of this nation's wealth is tied up in the housing market. If future generations are suddenly much smaller that will lead to a far smaller pool of future home buyers.

There will not be "mass deportations" no matter who wins in November. And there will still be plenty who want to come here.

Economy is certainly a big factor for immigration. When/if significant problems would occur, an outflow instead of inflow is pretty much expected.

[kernals12]

The current system is rather one-sided. If a borrower is underwater and gets foreclosed on, they still owe the difference between the sales price and the value of the loan, but it is extremely unlikely that the borrower will ever be able to pay that debt. On the other hand, if the sales price is higher than the value of the loan, the borrower gets to pocket the surplus. This asymmetry means all borrowers have to pay a higher interest rate.

Yes. The risk is on the buyer. If you don't want to deal with that risk, you can always rent.

Our tax code privileges homeowners over renters.

[SEWIGuy]

The current system is rather one-sided. If a borrower is underwater and gets foreclosed on, they still owe the difference between the sales price and the value of the loan, but it is extremely unlikely that the borrower will ever be able to pay that debt. On the other hand, if the sales price is higher than the value of the loan, the borrower gets to pocket the surplus. This asymmetry means all borrowers have to pay a higher interest rate.

Yes. The risk is on the buyer. If you don't want to deal with that risk, you can always rent.

Our tax code privileges homeowners over renters.

Huh. Are you catching on yet?