I'm constantly reminded to be thankful to be a homeowner in America. Most other countries don't even have fixed-rate mortgages and many of my international friends are facing massive unexpected jumps in their monthly housing costs.
Can you explain this more? When I rented, I paid a flat rate. When rent increased, it only went up 10% at max.
Now that I am a homeowner with a 30y fixed mortage, I have many unexpected jumps (thousands in home repairs, increasing property taxes and insurance). Unexpected jumps are way bigger as a home owner than they ever were as a renter.
Oh, and my house value has dropped $100k since I bought it.
Many people live in rental markets where rent increases are more than 10%. At least if you own there is some upside at the end of it. And you can estimate how much your upkeep will rise over the years.
You can figure on property taxes and insurance gradually but steadily increasing. Maintenance is more variable but you tend to get a general sense for it over time (although you can have unexpected big bills).
In general, I live in quite an old house (1800s) and figure it probably costs me a good $15K/year in taxes/insurance/maintenance/other upkeep not to go into maintenance debt. Can be a lot more or somewhat less.
> When I rented, I paid a flat rate. When rent increased, it only went up 10% at max.
10% is still a pretty serious increase. In France there's an index that is the max that rents can be increased with, and it's usually at max 6-7% (usually lower), and cannot be increased in areas that have significant housing shortage vis à vis demand.
Doesn't rent control compound the problem? In areas with housing shortage, if no one can move, then the supply is further constrained. New people moving into the city (or young people moving out of their parent's homes) have to pay current market prices.
Depends on which problem you're talking about. People getting priced out of the places they live by increasing rents? That one is solved by rent controls. The other big one, of people being unable to find where to live, is compounded to an extent, but coupled with other efforts (highly incentivised building of affordable and social housing, as well as various programs to help people buy the first time, and incentives to buy to rent (at fixed rates) it's not that bad.
All the renter's protections do create obstacles to renting though, with e.g. landlords demanding proof of salaries at least x3 or a guarantor with such salaries.
This lack of risk is exactly why prices are rationally so high. At least in other countries, they're irrationally high because people forgot about the risk of interest rate increases.
I agree that low fixed rate long term mortgages contribute to higher housing prices.
And the reason 30 year fixed rate loans are common in the U.S. is because the government (taxpayers) backstop most of the loans. Bank wouldn't be stupid enough to underwrite a 30 year loan at historically low interest rates of 3%.
The fixed-rate mortgages in the US are the result of government manipulation of the housing market. The other countries you refer to are using market-based solutions instead of government intervention. That said yes I can see why you'd like it. Those who are advantaged by government policies usually are happy to be on the receiving end.
How does this work in the American economy? Why does anyone buy RMBS at such low yields for 30 years with the capital risk that the money could come back to you if rates move against you?
US has Freddie Mac and Fannie Mae that essentially buy all OK mortgages from the banks so long-term liabilities don't ruin banks and FED can create more reserves when needed.
> Freddie Mac and Fannie Mae that essentially buy all OK mortgages from the banks so long-term liabilities don't ruin banks
FDMC/FNMA mostly buy up conforming loans and repackage them. In theory the bundling and government sponsored entity's (GSE) own equity would protect buyers of these repackaged bonds. In practice they did not and the government had to step in.
However, none of this protects against interest rates. If you take a bunch of 2 percent APY loans and bundle them, the resulting bonds are still 2 percent APY and everything seems good from GSE perspective. If rates rise to 7 percent, its just as easy to buy 7 percent rate conforming loans and bundle them into bonds paying 7 percent.
The problem OP brings up is one which the GSEs do not solve: if I own a 3 percent bond but the GSEs are selling 7 percent bonds, I have to sell mine for less than what the GSEs do to compete. The rule of thumb is the asset value drops one percent per APY point below market _per year of duration_. Knowing this, you would naturally shy very far away from mortgages because every percentage point is 30 percent of your delta. (It's a heuristic though, so its not like the example I gave actually trades at a negative price; performs better during "normal" sub 1pct changes.)
In practice people try to find arbitrage opportunities with ever more sophisticated instruments like interest rate swaps to "hedge the risk," but if markets are efficient this is a very small delta that could end up being a negative number. What we saw in 2008 was that the buyers were things like money market funds that prioritized retention of principal, but were dabbling in yield[1] enhancement strategies, given the whole "zero interest rate environment" thing.
Simple answer is prepayment risk is baked in into spreads. That is why it is higher than in Europe especially now give the risk of prepayment (in the form of refinance) is probably at all times high
Lenders are making certain bets that can come back to bite them. There are also various ways to hedge with credit swaps. etc. (Also per other comments, as a matter of policy, the US government has long wanted people to own homes.)
You typically can pay off mortgages in the US early but there's nothing magical about a loan generally that says I can just pay it off at any time for free. It depends on the term of the loan I signed. I may have lent you money because I want a steady stream of income for the next ten years.
It's the same way some bonds are callable and others aren't.
What are you talking about? It's exactly the same in Europe. Unless they get help from their parents, most middle class people need 30 years to pay off their homes here too.
It's the same shit everywhere in the west. Real estate is priced at the maximum amount the market would bear.
"Most" is probably literally true but I don't see people talking about the cheap housing in European cities like London. Yes, most people have historically taken out 30-year fixed rate loans in the US, in part because they are tax-advantaged. But nothing is keeping you from taking out a loan for a shorter period. I did when I refinanced my current house.
Usually an overpriced 30 year ARM (with a fixed period at beginning) and a restriction that you pay it off before retirement (so no 30 year mortgage if you're 45 for instance). Also a much tougher application process where people without "permanent" jobs are screwed. Of course, many, many people are on temporary contracts (because firing perm employees is hard). Possibly a stiff deposit req (I'd need a 20% deposit) and you can only borrow 4x your income. Having kids counts against you too.
At least this is the case in Ireland. I bought my house in cash.
> Possibly a stiff deposit req (I'd need a 20% deposit)
Note that, for Ireland, this is because you're a second-time buyer. It's 10% for first time buyers.
Today, mortgage rates in the US start at about 6% for a variable rate, or 7% for a 30 year fix. If you have <20% deposit you'll pay about 1% PMI, too. In Ireland, the age of the 2% mortgage is definitely gone, but you'll pay about 4% variable, or 4-5% for a normal 10 year fix. Avant will give you a 30 year fix for about 4%, though there is limited actual demand for such a product in Ireland.
By the way, you can get a mortgage that goes into retirement, though the bank will certainly want to see evidence of a pension... You can also get a mortgage if you're self-employed; you'll want about three years accounts and for either of these cases you'll probably need a broker.
So, really, it's swings and roundabouts to an extent; Irish mortgages are a lot cheaper than US ones. To some extent this is structural weirdness; the banks have more deposits than they know what to do with, and under ECB stress testing rules they have limited things they can feasibly _do_ with those deposits, so their cost of funds is relatively low.
Some of these aren’t that far off from the American process. It being an ARM, not being able to get a house if you’re going to retire, and the impermanent job type are a bit weird though. Usually for Americans, you need to show some years of steady income to qualify. It doesn’t entirely matter what your job is - as much as you can show with your tax returns that you’re making steady money (for years) that can afford the home. The having kids thing is weird and I don’t get why that would be against you.
I’m guessing there are much stronger tenant rights in Ireland where they have a harder time evicting the person and making it impossible for them to find housing later. (Credit score, legal records, etc.)
The 4x income and 20% deposit is very common here too. Going past 4x would require unusual circumstances. People doing lower deposits and/or higher ratio incomes are not common especially in the major cities. You might qualify for a special loan from the VA or through FHA but it has penalties like having to pay PMI and being locked to only homes of a certain price.
Interesting, thanks. I came of age in the mid-noughties (and then moved to Ireland) so my perspective on US is skewed.
Reposession in Ireland takes years. And the existence of strong protections against firing means banks only (usually) lend to people with permanent jobs, even if you have years of income on temp contracts.
