Re:Equifax removed the $125 claim payout option after millio...
by sokoloff on Friday August 02, 2019 @07:58AM
(#20592317)
Houses don't have to appreciate at higher than inflation in order for them to create wealth; they just have been in many areas due to the overall economic expansion. They can appreciate more slowly than inflation and the effect of leverage can still give them cash-on-cash returns higher than inflation or alternative investments.
On a conventional mortgage with 20% down, if the house appreciates at 1% per year in a 2% per year inflation environment, a $100K house goes up by $1K each year. Someone who bought that house with $20K down sees a $1K gain on their $20K cash investment, for a 5% cash on cash return. They also have a place to live typically substantially cheaper than they were paying in rent. Obviously, where they increase even faster than inflation, this is wildly beneficial and if they decline much at all, it's terrible.
3% down mortgages seem to cost around 1.25% more than 20% down mortgages. It's about 1/8-1/4% on the base interest rate and 0.5%-1% for PMI. With a base interest rate on a 30-fixed around 4%, paying 5.25% on a 3% down mortgage is still a good deal IMO.
If landlords had to pay cash for rental properties, I'm not convinced that you'd see such a surplus of rental properties such that it would drive rents down significantly. Rents are driven by ability and willingness to pay. Many small landlords would be forced out of the supplying housing to others work. If landlords could borrow money to buy houses but owner occupants couldn't, I think you'd see a massive defection of the housing economy in favor of landlords.
Obviously, anyone could borrow on unsecured terms. It seems likely that medium and large landlords could exploit that (borrowing against the projected cash flows, but without using real estate as collateral for the loans) and that would also result in a large shift of power away from owner-occupants and small landlords.
On a conventional mortgage with 20% down, if the house appreciates at 1% per year in a 2% per year inflation environment, a $100K house goes up by $1K each year. Someone who bought that house with $20K down sees a $1K gain on their $20K cash investment, for a 5% cash on cash return. They also have a place to live typically substantially cheaper than they were paying in rent. Obviously, where they increase even faster than inflation, this is wildly beneficial and if they decline much at all, it's terrible.
3% down mortgages seem to cost around 1.25% more than 20% down mortgages. It's about 1/8-1/4% on the base interest rate and 0.5%-1% for PMI. With a base interest rate on a 30-fixed around 4%, paying 5.25% on a 3% down mortgage is still a good deal IMO.
If landlords had to pay cash for rental properties, I'm not convinced that you'd see such a surplus of rental properties such that it would drive rents down significantly. Rents are driven by ability and willingness to pay. Many small landlords would be forced out of the supplying housing to others work. If landlords could borrow money to buy houses but owner occupants couldn't, I think you'd see a massive defection of the housing economy in favor of landlords.
Obviously, anyone could borrow on unsecured terms. It seems likely that medium and large landlords could exploit that (borrowing against the projected cash flows, but without using real estate as collateral for the loans) and that would also result in a large shift of power away from owner-occupants and small landlords.