Get rid of the 30-year mortgage

 Residential Mortgage  Comments Off on Get rid of the 30-year mortgage
Sep 252019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Get rid of the 30-year mortgage? So says Ed Pinto, a resident fellow and the co-director of the Center on Housing Markets and Finance at the American Enterprise Institute (AEI). In a recently posted article, Mr. Pinto argues that a 30-year term greatly increases the risk of foreclosure and has led to higher home prices for entry-level homes.

He cites statistics showing that foreclosure rates were almost zero during the 1950’s (prior to the advent of the 30-year mortgage) and that a 30-year loan is about twice as risky as a 20-year loan. He also notes that in the 50’s the median price of a home was roughly two-times median income. Today, the ratio is over 3.5.

Mr. Pinto’s arguments are thought-provoking, but I’m not sure the proposal, elimination of the 30-year mortgage, is reasonable. A 30-year term results in a lower monthly payment, making it possible for someone to purchase a higher-priced home than if she used a 20-year mortgage.

The issue of risk in my mind comes down to a question of public policy.

  • If 30-year loan rates reflect the higher associated risk of foreclosure, should that be acceptable?
  • If as a society we’re not willing to accept any risk of foreclosure, then are we willing to accept a higher interest rate (or government subsidy) to internalize the costs associated with supporting those who lose their homes?

Finally, Mr. Pinto argues that the 30-year mortgage has made entry-level homes less affordable. I’m not buying his correlation. While it makes economic sense that a lower monthly payment would lead to more demand for homes pushing prices up, the market would correct for that by creating supply to meet the demand. Moreover, there are too many other factors that could explain the fact that entry-level home prices have increased more quickly than move-up home prices, such as mortgage programs that target and subsidize first-time homebuyers.

Rate update: Reasons rate should be lower

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Reasons rate should be lower
Sep 162019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

What a difference a couple weeks make. Last week, the press was reporting the lowest mortgage rates since 2016. This week? Well, we lost a little ground. Rates rose about half a point in two weeks.

So, if you approach decisions cautiously (like I do) and didn’t jump into a refinance, are you out of luck? I think not, but you may have to practice a bit of patience. Last week’s bounce higher may have been nothing more than a market reaction to the rapidity with which rates fell at the end of Aug.

Recall back to earlier posts when we discussed the reasons rates were falling: Europe appears headed for a recession, Brexit remains unresolved, and China’s economy is slowing dramatically due to the ongoing trade dispute. On top of that, talking heads have spent the summer trying to talk the US economy into a recession. Little has changed to mitigate those concerns.

Given that, I think it’s likely rates will ooze back down again. The question is when. Here’s what I’m watching:

  • The Federal Reserve meets this week, and pretty much everyone expects it to cut short term rates by a quarter point. That’s already priced into rates. What I’ll be watching is what the Fed puts in its post-meeting announcement and what Fed head Powell says at his press conference. If the Fed doesn’t acknowledge ongoing risks to the economy, rates will remain elevated longer.
  • Second, US manufacturing data has been soft, but consumer data has remained strong. If consumers stop spending money, the US economy will be headed for a soft patch, and that will move rates lower.
  • Finally, the trade war with China is hurting both countries, but it seems to be hurting China more. That may be softening China’s resistance to compromising on some of the thornier issues. A complete resolution seems unlikely anytime soon, but a thawing of positions might give markets confidence in the US economy and keep rates higher.