The mortgage “industry” post 2008 largely consists of companies that act as sales or servicers for the federal government.

If you are unhappy with the general shape of residential lending in the US blame falls squarely on the federal government. Not just as regulators but as far far away the largest direct participant.

There’s a great book on this subject.

Lords of East Money by Christopher Leonard

Central banks make interest rates artificially low which makes asset prices (houses) artificially high.

The mortgage industry isn't really to blame for high prices.

Is there a “natural” interest rate that currency would have w/o central bank intervention?

Yes, that would be the market interest rate based on supply/demand, as any other good. If supply >> demand (a lot of people have a capital they don't know what do to with) then you get a low interest rate, otherwise a high interest rate.

Centrally controlled interest rates are basically price controls. The govt controls the price of money. Even a 5 year old knows price controls don't work, but we can't expect that from the govt.

Even a 5 year old knows that there's a significant difference between price controls in a supply-constrained market and price controls in a supply-unconstrained market, and that it's intellectually inappropriate to gloss over that difference, and pretend that bank loans that print money up out of thin air are the same thing as, say, automobiles and frozen orange juice.

I’m well over 5 years old and this doesn’t make much sense.

Probably by not giving people loans for houses, which would make them equally unaffordable for people, but in a different way.

A 400k house might instead be a 200k house, but you will never have 200k in cash compared to 20k for a down payment on a mortgage.

Moneylenders have always existed when legal.

There would absolutely still be mortgage lenders without artificially low federal funds.

I manage a fund in Canada that does exactly that. We have a pool of investors, and lend out on mortgages only. Primarily in markets larger institutions won’t touch.

> would absolutely still be mortgage lenders without artificially low federal funds

30-year fixed-rate mortgages for middle earners are a policy creation, not a natural market creature.

30 year fixed rate mortgages aren’t available in Canada. Most have the interest rate adjusted every 3-5 years

That’s my point. There is no natural market for 30-year fixed-rate mortgages to the middle class.

Hard to argue that a 50% price reduction is less affordable. Ever heard of owner-financing?

I think it's 10-12%. That's the rate I am able to get money from private investors at.

What rate would you feel comfortable loaning money to friends or colleagues at?

Yes, loans predate central banks by a long shot. They were prevalent in ancient Rome and interest rates were determined by the market based on risk, supply and demand, etc.

Interest rates from lenders are still based on risk/supply/demand etc.

The question is more, how do you introduce money to the money supply (which you must do if for no other reason than physical wear/destruction of currency) without a central issuer who sets an interest rate on that issuance?

Banks create money out of thin air when they originate loans. Various regulations and central bank activities are designed to control this process, but they are somewhat indirect - they don't tell a bank 'this is exactly how much money you are allowed to create', instead they enforce things like capital ratios and provide liquidity in various ways, and the money creation is then carried out by the bank rather organically.

And can’t they currently set whatever rate they want for that still?

Indeed. Strongly influenced by the ambient financial and regulatory environment of course.

The ability to get a loan for some % of income over 30 years also props up housing prices. If the standard mortgage term were shorter, housing prices would arguably have less upwards pressure (but this might make it harder for lower income participants to compete with higher wealth participants.)

This is mostly only true in cities where lot prices are super high - which actually isn't the case in the majority of US cities.

It's hard to imagine commodities being substantially cheaper if we didn't have 30-year mortgages.

Home builder margins aren't impressive.

The cost of a new home is pretty much the cost of the lot, plus the cost to build it, plus a 10-20% margin.

That margin isn't going down a lot, even if you don't have 30-year mortgages. All that's happening is that the size of US homes would be much, much smaller.

Constrained supply and DINKY households are the two big factors that have driven up house prices in recent decades. Not mortgages in general.

Help me here, but this makes no sense. DINK households have no children and therefore need less housing and have more flexibility when choosing housing. Perhaps it might impact trendy cities like San Francisco where DINK is not by choice (hence more DINKs) since it costs too much to have kids in a non-kid friendly community.

We have a much greater proportion of couples where both members work than before. This means higher bids, and higher prices. The people that did well out of this were the people who already owned property; they've had a lovely transfer of money from those workers.

I still fail to see a clear causal relationship between increased dual income with no kid couples and increased housing prices. The assumption I guess is that having more money from dual income implies that buyers will pay more, but there are several flaws with this:

1. Many modern couples actually have less income available for savings and housing despite having two earners say compared to single earning couples in the 50’s and 60’s when gas station attendants could afford to buy a home for a wife and several kids 2. Extremely low Interest rates have caused a much higher impact on available funds to buy homes than increases in available funds for housing from wages 3. No kid couples require smaller, cheaper houses without regard to school districts, family friendly environments, etc.

Yes. Housing is a human need just like breathing air or eating food so if you can create artificial scarcity there you create value out of nothing. The average home cost around $50k in materials to construct, but after it’s assembled it magically worth 250k? Lol the math doesn’t make sense.

Try to build your house for 50K and you will see where the extra cost come from. Land and labor

* * *

Land and labor are not free.

Land is actually valuable because its scarce. And as for building costs I highly doubt it cost 100k for the labor.

These days even pouring a driveway can cost in the tens of thousands of dollars.

Constructing a house is rather expensive, here’s just a random link from google:

https://www.ramseysolutions.com/real-estate/how-much-does-it...

Another random link claims 30-50% of the cost is labor:

https://www.bankrate.com/real-estate/cost-to-build-house/

The land has some value. Also, home construction seems very inefficient - every home is a snowflake even if identical to the one next door. Drywall finishing as an example is very time consuming and hard to do correctly . You need a lot of experience to be good at it (if you don’t believe me, just try it and weep at your results). Then, once this is done even painting is an entirely manual process costing $4K+.

How does the mortgage industry "makes houses unaffordable to so many people".

It literally does the opposite.

It's more a supply / demand issue than anything to do with mortgages. When an essential good's (housing) demand outstrips supply, all surplus goes to $0 to reach the clearing price for that supply.

Ex: In SF there were a lot of good big tech jobs paying $200k-$1m / yr. A vast majority of those wage increases accrued into the hands of landlords. Mortgages allow buyers to borrow against projected future earnings, allowing each buyer an affordable price compared to one who doesn't mortgage, but when everyone does it the benefits get nullified.

The benefits aren't nullified. As a result you have more homeowners and fewer people paying rent.

This is the desired outcome.

But that's because SF broke their real estate market. In a more functional one the cheap money flows to builders as well and they then build more houses bringing prices down.

Why do we need the mortgage industry, which charges a premium over the prime interest rate? Why can’t the Fed lend directly to borrowers? Why do we need intermediaries in the provision of mortgages?

Mortgages have higher risk and servicing costs than the lending done at prime, so they are going to be done at a premium to it no matter who does it (unless it is yet another government subsidy to homebuyers at the expense of renters.)

Because the Fed is not equipped to evaluate risk on that scale.

While offering mortgages might (like a traditional bank), the "mortgage-debt industry" profits from transacting on debt (the subprime mortgage crisis was a better example of this, and while the industry was bailed out the homeowners were not) which ties in with increasing housing costs (for instance, allegations about certain companies buying up housing stock and overpaying strategically to increase valuations) and foments disparities in housing.

Houses would be a LOT cheaper if people couldn’t take on mortgages, especially not 30 year ones.

And yet you would discover that most people couldn't assemble the necessary funds at once, certainly not near the beginning of their careers.

Low interest rates make it harder to pay cash. So, the mortgage industry has been in this weird loop where you have to use it, even if you could have afforded a house without it.

In two extremes: Imagine a market with 20% interest rates. You could just save money instead of holding the loan for 5 years, and then pay cash. Fewer people would have mortgages.

Imagine 0.1% fixed, interest-only loans. Financing a house with that would cost about 1/200th as much as in the 20% environment, so prices would increase by something like 200x.

We are coming out of ~2% rates. That means houses should cost a bit under 10x more than they would at 20%. If you put 20% down, you could probably have purchased outright in the other environment.

(This ignores the possibility of new construction, since I live in California, and that’s more realistic than saying people will be allowed to build housing to take advantage of low mortgage rate arbitrage).

What does inflation look like in your hypothetical with 20% interest? Do house prices not inflate?

Higher interest rates (for subsidized loans) should lead to lower inflation, since it is analogous to the government printing less money.

Instead of a 5 year loan you just save up to buy a house? I suppose this is just a hypothetical?

Because even when interest rates were high, people were not generally buying their homes in cash.

That's like saying instead of renting for years you could just save that rent money and buy a house after a few years.

And with low rates, no one was buying a house with just a 5 year mortgage either.

The only reason you are seeing a lot of cash buyers right now is that you have lots of people who have sold their homes at inflated prices after buying years ago at near nothing and now that prices are falling, they have the cash to buy. But that won't last and it will soon be back to only the small group of people with very big incomes or family money and investment firms that are buying in cash.

Nor can they save for the downpayments, which are not far from where the prices used to be before the explosion that I attribute to cheap loans.

If no one can afford even a down payment it's because supply is too low. It's not like there are tons of empty houses that mortgages are preventing buyers from acquiring.

Also first time home buyers qualify for very low down payments, like 5%, fwiw.

Supply isn't too low, supply has being diverted to investors who often don't reside in the home, or who short term rent it. If there was a big tax on non-owner-occupied single family homes that made it unprofitable to buy and hold or vacation rent, housing prices for single family homes would drop hard.

> housing prices for single family homes would drop hard.

No, they wouldn't. as evidenced anywhere this is tried

I'm going to need you to back that up with a fair amount of data, because this seems like an easy place for someone with an agenda to strawman.

First time homebuyers can get a FHA mortgage for 3% down. I think most people thinking about buying a house could put together $7,500 on a quarter million dollar home. And if you're looking to spend more than a quarter million on your first home, well then maybe that's the issue. Starter homes exist in all but a handful of cities.

Let's say cheap debt isn't available and house prices drop to 30% of their current value. According to the first google result I find, average house price in the US is slightly over 400k, so 30% of that would be 120k. How many people do you reckon have 120k in savings available? I'm willing to bet it would be a lot less than the amount of people that can currently get a mortgage.

Owner financing

Borrowing money to buy a house is still getting a mortgage, whether you borrow the money from a bank or from the previous owner of the house.

You said “How many people do you reckon have 120k in savings available?” to pay cash for houses with no financing available within a thread regarding the collapse of the banking mortgage industry.

Owner financing is a very different instrument from a traditional mortgage. Most importantly, the terms are completely negotiable, meaning that buyers can obtain low interest owner financing even when general interest rates are high, especially when owners are desperate to sell. Owner finance instruments can also be obtained by less qualified borrowers, are not backed by government agencies, servicing costs are negligible, and many do not report to credit bureaus, which has significant implications to borrowers.

Owner financing rates may be lower than general interest rates, and can be when the seller is family of the buyer or is otherwise related. That will not generally be the case if owner financing becomes the norm though, why would anyone charge lower rates than general rates to some random stranger, especially if it is a borrower who is "less qualified"??? Let's not forget that the previous owner now has to rely on this "less qualified" borrower to honor their commitment for (potentially) several decades. Large financial institutions can amortize this risk over many loans and can afford to have entire departments to assess and manage the risk. Individuals would not be able to do so nearly as well.

If anything, the 2008 financial crisis should have taught us that lending more money to people than they can responsibly bear is not a wise idea, neither for the lenders but also not for the borrowers.

There would also be very few houses. Or do you think economies of building become infinitely cheaper when all demand is removed?

housing doesn't need to be unaffordable. 200 years ago people paid of their houses in 10 years or less! this issue isn't mortgages. the issue is houses are way too big and land is too costly and regulation drives up the cost to build, oh and property taxes of course. address those 3-4 issues and everyone can afford housing with ease.