Sorry but wow. This is not the kind of comment I expect on HN, but rather from my uncle:
“We got this new Lexus, it’s only $500/month!”
“Yes, for 200 years”
You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.
I believe what he is actually saying is that most people _only_ care about their monthly payment.
Caring about the monthly repayment is important.
But so is caring about the interest rate and the principal.
I stopped into a car dealer to look at a vehicle a couple years ago. I liked how it drove, could pay cash, but wasn't opposed to taking out a loan if I could get a better price overall (sometimes possible with fees banks pay to used dealers for getting a loan originated).
In my experience, they brought out a sheet of paper with a range of what the monthly payment would be. I asked about interest rate, and the sales guy had no idea what interest rates the payments equated to - but he could get me an exact payment after doing a hard pull on my credit. They resisted negotiating on the total cost of the vehicle, but were very willing to extend the loan out to make the payment exactly what I wanted/could afford.
I could see it wasn't going anywhere, told them to call me if they get serious about reducing the price, and left. I found a great car on the private market a short time later.
I did my house shopping the same way. For some reason realtors are a lot better about negotiating the actual sale price than car dealers are. I never really had a realtor try the "So, tell me about your maximum monthly payment!" pitch on me, probably because you're expected to have your financing lined up before you shop.
If you're going in to buy something with a "max monthly I'm willing to pay" in mind, you are setting yourself up for a really bad deal.
Then again, we basically didn't go to a dealership other than for test drives. We e-mailed every dealer within an hour and a half of us with "This is exactly the make and model we want, these are the options, this is the color (but we're open to substitutions), what's your best price?" We took the lowest bid, and if there was any funny business (there was with one), we walked.
Most dealers now have online sales departments that are setup for these low-overhead but low-price transactions (this was a rarity when I bought mine in 2009). Apparently the sales guy we bought from sells 3x more cars than the next-best sales guy at the dealership, because he knows how to price the cars to move online and then acts straight & efficient when the buyer comes in.
He held up his end of the deal, paying 18% interest on a massive truck loan for 3 months.
The sad thing is many people would do the same thing without the ability to pay it off in full. At that interest rate and a ~7-10 year loan term, you'll be upside down on the vehicle until the very end of the loan. And most people wouldn't keep the vehicle that long because something else changes in their life...or they just want a newer vehicle.
Another example is most people never pay off their mortgage. Some refinance, often several times, resetting the term. Eventually they'll sell the house, pay off the mortgage as part of that transaction, and keep the change (if they're lucky.)
I haven't owned a car and i'm almost 30, and have always enjoyed public transport so far.
When I'll decide to buy a car, I'll just f-ing pay it in full and be done with it.
That's what I did, and as such I agree, but just be aware that you might very well end up paying more overall that way (assuming you're buying a new car from a dealer).
I saw this vividly when I bought my first house. It cost $61,000. My mortgage was at 9%. Two years later, mortgage rates had dropped to 7%, and my house was worth 90,000 (state appraised value). If I had bought the exact same house two years later than I did, I would have had the same monthly payment. That stayed constant, and the interest rate change drove a change in total price.
Part of the reason is: What is your alternative? Typically, renting. What's rent? A monthly payment. So if you're looking at a buy vs. rent decision, a big part of the decision is monthly expense of renting vs monthly expense of buying.
> is monthly expense of renting vs monthly expense of buying
Note: "monthly expense of buying" is very different than "monthly cash flow of buying".
The "monthly expense of buying" is the monthly interest paid, taxes, and maintenance.
The "monthly cash flow of buying" is the monthly mortgage paid (principal and interest), taxes, and maintenance.
When deciding to buy a space, you need to use the "monthly cash flow" to ensure you don't default on the loan. When comparing buying vs renting a space, you need to use the "monthly expense".
Houses are nothing like cars. I haven't had a car payment in many years. I'm still a long ways from never having a house payment.
This means that car payments are more of a cost of ownership and house payments are more of a reoccurring investment.
As long as the house is actually a good investment, being able to afford the down and monthly payments is the most important thing. Rather than spending vs saving/investing, the trade-off becomes more of investing in real estate vs investing in something else.
Where "stop playing the game" means get out of hot housing markets :/
Salesmen, well auto sales, are trained on the four square method to get you to buy. You could attribute the mortgage crisis a decade back as falling into this situation.
The barrier to buying a home used to be the down payment but creative financing is what got a lot of people in over their heads. It all about that cost per month.
Now people who over reach tend to forget all the other costs that come with auto and home ownership, namely insurance but owning a home has long term costs too.
https://www.consumerreports.org/consumerist/dealerships-rip-...
House prices are defined by demand. If your uncle wants to buy a house with a 40 year mortgage of half his salary, then I'll have to pay more to match it.
The price is certainly relevant when it comes time to sell, and a high price due to low interest rates leaves you more vulnerable to price shocks in the event rates need to rise.
Of course we haven't seen any major price depreciation due to rate increases in the last few decades :)
https://fred.stlouisfed.org/series/CASTHPI
https://fred.stlouisfed.org/series/FEDFUNDS
But you're right in the sense that we haven't seen the drop in home values (or any high capital asset) associated with the increase in interest rates of the 60s through 80s.
Unless we're willing to go negative, that cycle is coming to an end.
From a HN perspective, this means it's hard to buy a house and do a startup; you'll never accumulate enough savings to reduce the risk.
In the inflation-adjusted past, you had the option to save up $100k or get a $5k/month mortgage; now you have the option to save up $1M or get a $5k/month mortgage. The monthly payment hasn't changed but the space of options and (and their risks) certainly have.
But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.
If you view homes as day trading then yeah, there's risk in interest rates. But it's a home - a place to live if it's a primary residence. Ultimately if interest rates go up I don't really care since I don't plan on selling anytime soon. It doesn't change MY monthly payment. And if I did want to sell, well I'm staying in the same market - housing. So prices would drop across the board. So yes, maybe I can't sell my home for much profit or even a loss, but my home isn't the only one affected by this. Because you're in the same market, whatever you trade it for will have suffered a price drop as well.
Likewise if you buy a home while interest rates are high and they fall. Your home will have gone up in value but so will any other home you want to buy. So you're in a similar situation.
So I'm not worried about tail risk here. You do expose yourself to risk, however, if you buy more home than you can afford and we run into rough market conditions which put your income at risk. If you can't cover until things improve then you end up like the many people in 2008/2009 that lost their homes due to being over leveraged (mortgages are leverage, after all). This isn't unique to homes, however. Margin has its risks.
Here's how I see it, and I realize I'm fortunate: If interest rates begin to rise considerably over the next decade, reversing the trend of the last 40 years (!!!) then I'd consider pulling a portion of cash from certain investments to buy a home with cash after selling my current home for whatever p&l I get - if I want a new home. Or I'd just continue to live in my home and not worry about it. After all, I view my home first as a place for my family to live comfortably and then secondly as something I could make a return on one day maybe. But that isn't my primary concern.
If anything, I'd probably stay in my current home and then buy a second home (a vacation home, rental, etc) with cash.
Don't forget the tail risks of inflation.
The risk of not buying a house in a low-rate environment is that inflation takes off, the price of the house goes up 10x to match the price of everything, your rent goes up alongside everything else, but the people who bought still have the same payment as before. Interest rates went up to ~18% in 1981, but that still didn't take average prices down from the $47K in 1980 back to the $17K they were in 1970. A real estate bear market is usually 10-20%, not the 3-10x that home prices go up in a high inflation environment.
It kills any idea of getting a real return on your house but frankly that was not a real thing through most of history anyway.
IMO, for primary residences you did the right thing (if you want a house of course).
Another nice thing about owning a home is you can improve it (additions, adding bathrooms, etc) and certain additions more or less pay for themselves in terms of "getting your money back" over enough time. Again, probably not going to outperform the market, but you get to live in it. So even if the market tanks for a few years, I still get the benefits of whatever I've invested in my home.
The trick is to not overspend on a home. Too many people use all their savings to make a downpayment and then use too much of their income to pay for it. This can not only get you in trouble but also puts you at a serious disadvantage in terms of accumulating wealth.
All things degrade due to entropy. Things cannot truly become more valuable by themselves.
I think raw land is one thing that can become valuable on its own. Of course billions of years from now it will be gone.
Where I live the land is very much a big part of the cost of the home. The structure is worth what it would cost to demolish plus rebuild it minus existing wear and tear/needed repairs I figure. The value of the structure doesn’t appreciate as fast as the land it is on due to degradations as you’ve pointed out and materials/labor usually not increasing as fast as appreciating assets which the land itself is. Of course in many locations the structure is worth more than the land it is on.
Hence location being the most important part of the equation as any real estate agent will tell you.
The land doesn’t become “valuable on its own”, it’s just used to extract value from other things.
> In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.
> ...
> As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.
Wealth of Nations
They can stay high or low for quite a long time...
If interest rates go up to 6-7-8%...double digits, the housing market would be a bloodbath.
Mortgage rates: https://themortgagereports.com/61853/30-year-mortgage-rates-...
Housing prices: https://inflationdata.com/articles/inflation-adjusted-prices...
Inflation-adjusted housing prices went down about 20%. Nominal home prices basically stayed constant for about 2 years, then resumed marching upwards.
Also note that the actual bloodbath happened from 2006-2012 (when the housing crash took prices down about 35%). It does not correspond to any major increase in interest rates. The primary driver seems to be foreclosures, which in turn was driven by ARMs and poor lending standards. Conclusion might be that interest rates just don't matter that much as long as a majority of people are on fixed-rate mortgages, while they can matter a lot if folks are on ARMs they can't afford. (Interestingly, we may get a similar crash of multi-family housing in the near future, since all the tenants not paying rent now is having a similar effect on mortgages.)
My mom was a teacher and said that when she graduated in college (late 60s), teacher salaries were maybe 20-30% below engineer/lawyer/professor salaries. By the time I was born (early 80s) her classmates in those professions were making 3x what she was.
It's possible we hit a point where inflation ticks up due to recent stimulus/printing, and the Fed is forced to raise rates suddenly. The recent change to allow inflation to run past 2% indicates they're likely to let it run for a bit, though.
So either one of us has some miscommunication, or things are different where you live.
On the other hand, where I live a reasonable small house is £150,000 and senior developer wages are about £30,000 (net). People need mortgages.
Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.
This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.