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What absolute drivel. This myth was obviously formulated by some wealthy economist who had only ever worries about purchasing vacation homes.
People put off buying homes UNTIL THEY CAN AFFORD IT. How many people does the author think are currently in the streets or renting for years just so they can save a bit on their mortgage? Completely garbage.
But companies will have to lay off workers! Oh wait, they're already doing that despite record profits.
Companies will stop giving raises! Oh wait, they've been doing that for decades.
The economy stopped working for the average person. It's been going on so long now that it's normalized. People are afraid. We need to wake up to our exploitation.
And I say this as a person who is well paid, at a company that treats its people well. I've worked enough other jobs to know how abnormal my situation is and will gladly fight alongside those who aren't as lucky as me because I refuse to accept the "fuck you, I've got mine" mantra.
I mean - I could afford a home now, it's just stupid expensive and I'd be leveraged up to my eyeballs. You do usually need to have the deposit in on-hand cash (though if you're sneaky and an utter idiot you could probably find some way to borrow for the down payment).
I understand where you're coming from but it's accurate language to use because a lot of people technically could afford to buy homes right now they just know it's dumb and realize the market is about to collapse and they'd end up underwater on like an 8% mortgage.
I could make mortgage payments standing on my head considering what I pay in rent. It’s the down payment that’s the killer for me.
Aside, it is absolutely fucking insane that rents usually far exceed mortgages. The rent does need to account for the lack of liability for depreciation property damage (like, if your apartment floods you're not on the hook to replace your floor boards) but in a lot of markets it's become entirely detached from reality.
With persistent deflation, that down payment would have to be 100% of the price of the house.
As for right now, you don't need a 20% down payment for a house. That just avoids mortgage insurance. You can get rid of that once the remaining mortgage is at ~80% of the current value of the house. We got rid of ours in 3 years with a 10% down payment but that was in a booming market in the fastest growing large city in the country. It may not even make financial sense to buy in your area. If it is going to be an extra $1000+/month to buy vs renting, stick to renting and make sure you are filling up your Roth IRA and if you have more, throw it into a savings account which actually bears interest now.
And of course if you are doing something as lavish as eating avocado toast or getting coffee from a coffee shop....keep doing that of it makes you happy. It is not going to really amount to shit.
I borrowed for my down payment. It was in 2009, and I bought a 3bed/2bath house in a major city for ~$100k that is worth probably close to $500k now.
Am I an utter idiot, or are there circumstances where borrowing for the down payment is the right move?
There are circumstances when it's appropriate but it's really risky. It's extremely easy to find yourself underwater in debt if you've borrowed the full amount. In 2009 when the housing market had fully crashed it was probably an acceptable level of risk.
People have been saying the housing market is about to collapse since 2012.
I used to think that maybe the housing market is overheated and prices will go down, so I should wait before turning to the mortgage.
It was almost 17 years ago and the market is now worse than it was then
With the interest rates what they are, it makes sense to wait on buying a home, even if you can technically “afford” it. My mortgage would be 60% higher if I bought today vs. 2 years ago when interest rates were a lot lower.
Except even then you can plan to refinance. There's tradeoffs- it's a pain and you have to pay additional costs, but if the rate is that much of a problem it's usually worth it. Plus the additional history of a few years of mortgage will likely help your credit score.
And there's even more context. You're talking about buying today- my parents had immaculate credit and a huge down payment when they bought their house in the 80's. Their interest rate was 15%. The US has had artificially low rates for decades, to the point where people are considering 6% and 7% to be "high".
Rates will certainly impact who can or cannot afford to buy a home of course, but the only ones who are deferring purchasing at all for that reason are people viewing their home as a financial instrume that needs return on investment. If you need a home for shelter, a slightly higher rate is still a way better financial decision in the long-run than renting most of the time.
I'm sorry to be pedantic but this is a pet peeve of mine. If you bought a house you would not have any mortgage payment. You (and everyone else usually) are talking about financing a house.
Maybe I'm the crazy one but when I buy something I like to look at the total amount that I'm paying for it.
If I wanted a house listed for $300,000 5-years ago and I wanted to finance it, the rate might have been 3% so the total amount I would be paying would be $455,332.36 over 30yrs. Therefore I would only finance if I thought ~$450,000 was a fair price. If I thought the house was only worth $300,000 then I would need to pay in cash.
Today rates are at 7% so a house listed at $300,000 actually costs $718,526.69 when financed. Do I think the houses I see listed for $300,000 are worth over $700,000? No. Do I have more than $300,000 needed to afford to pay in cash? Also no. Therefore, I'm not buying.
*These calculations are ignoring the down payment but the principle is still valid.
I'll up your pedantry with even more pedantry, colloquially "bought a house" is understood to mean "closed a deal on a house with financing" - "bought a house outright" would be for a full cash purchase.
I don't mind unnecessary pedantry where appropriate, but you're incorrect in this context.
And, technically speaking, when you buy a house (mortgage or not) you become the owner of that house - you're just also receiving a loan with your house as collateral. So, if you fully paid off your house and then applied for a loan to start a business would you consider your house no longer owned by you?
If we really dig down here your pedantry about buying a house becomes quite meaningless because the loan using your house as collateral doesn't mean you're any less an owner of your house - you own it, fully and completely, you just also have an outrageously large loan using it as collateral (granted it's a pretty special loan for a number of good social reasons).
It is extremely good to acknowledge how much that loan interest rate is effectively increasing the price of your house though, far too few people realize how much actual money they end up paying.
*$700,000 in 2054 money. By 2054 a new car might be $150k, and 700k won't feel too bad.
Thanks for the clarification of Time Value of Money.
I would disagree with you on the pedantry. There would be two separate transactions: a buy buys the property from the seller, and the borrower borrows from the lender.
The property is treated as collateral, but the buyer/lender is the owner of the property. Mortgages are a bit special different from most common consumer debt because of the timing- the transactions need to be simultaneous because you need to have the collateral to get the money, and you need the money to get the property, but afterwards you still have ownership of the property.
Whether it's a mortgage, a car, putting a latte on your credit card, or a multi-billion dollar corporate acquisition it's the same.
That aside, the rest of your comment I agree is good advice to consider, but it's just part of the equation. You're assuming the mortgage is actioned as plan throughout it's lifetime. However, the borrower has options. They might want to pay early and will save a lot of interest that way (maybe more than just interest if they have PMI). There's also the option to refinance out of a higher rate later on.
Also... You're comparing two different things by asking if a house listed for $300,000 is worth $700,000. In order to do a fair comparison, you need to do the same calculation for every house you consider and for the entire market you're basing your expectations around. The only houses worth $300,000 when you factor in the interest of a 30 year mortgage would be a fraction of that cost. Or if you're comparing to the alternative of not buying, then what you really need to compare is the cost of renting vs the interest you expect to save in whatever period you expect to defer buying for.
Don't forget to account for the rent if you don't finance a house.
So in theory, it's not exactly wrong. If you're going to buy a house that's $300k today, but you knew that it would be $250k tomorrow, why wouldn't you wait? And the next day you see that the price has dropped to $225k, so why wouldn't you wait a little bit longer?
That's why the Fed tries to maintain a positive inflation rate- if your money is going to be worth less tomorrow than it is today, you would want to spend it as soon as possible to maximize your purchasing power (assuming you're a rational actor, which is always a toss-up when discussing economics).
In practice, you're exactly right. I've seen people not buy houses because inflation was too high and they couldn't afford it, but nobody was waiting when inflation was low for it to get even lower before buying a house. Mostly because when housing gets too low, rent-seekers start buying them en masse.
The problems are 1) when your inflation rate is too high, because then people just don't have the money to buy things so instead of not buying because they don't want to, they stop buying because they can't spend more, and 2) corporations used COVID as an excuse to jack prices up because they could. When your production is back at pre-Covid levels but your pricing isn't, simple supply/demand curves aren't enough to explain why. (Also I'm not saying that all production and manufacturing has returned to pre-Covid levels, only that it's been a long time since I went to the store and couldn't get what I wanted or a reasonable substitute yet those things are more expensive than they were five years ago.)
The other thing missing is you need to live somewhere now. You also have other considerations - if you are starting a family you typically will need to have a place for the family to live and that forces you to buy now. This is why most deflation arguments fail - people need to live, so they will buy food, and shelter (including clothing). People will replace their broken down car. People will buy toys if they can afford it.
Even if you can buy the house for $200k next year, you don't know that the price will go down - I've seen prices go down and then go back up more than once in my life. Maybe you get unlucky, but maybe you bought the bottom, you have no idea what inflation/deflation will do in 5 years and only educated guesses for next year.
Yeah, we would move tomorrow if we could afford to. We own a house that is a nice house in a nice neighborhood, but not in a desirable town, so it's not worth much. We can't afford to sell it and buy a house somewhere else. We're not waiting for a good deal, we can't afford any deal right now.
This is a misunderstanding of the issue. If money gains value by sitting in a mattress, there is incentive to not spend or invest and large portions of it effectively gets removed from the economy altogether.
How many people can afford to keep their money under a mattress though? According to studies last year, 57% of Americans could not afford a $1,000 expense.
Why is saving such a bad thing? There's so many articles about how people aren't saving enough for retirement (especially with pensions disappearing as a concept over the last several decades). I know it's been a couple of decades, but just a couple generations ago consumers used to actually benefit from the interest on their savings. My mom likes to talk about how she used Certificates of Deposit to slowly get low-risk, passive income that exceeded the rate of inflation and her mortgage rate and helped to pay off her house. I check every few years and even now CD's just aren't worth bothering with because the rates are so low.
"Savings lowers spending, that's the paradox of thrift. Keep that money in your pocket and the growth will never lift" has some truth to it, but why do we need to perpetually grow on a planet constrained with finite resources? When will our hunger be satisfied?
A lack of savings creates more volatile markets and a worse quality if life for everyone because of it. Toyota famously led the way with their "just in time" business model- reducing inventory down to the absolute bare minimum to operate (savings is not just limited to money). Pretty much every manufacturer in every industry followed suit. Toyota learned it was a bad idea when Japan was hit by an earthquake and they struggled to get parts to make cars- they then reversed course and kept a modest supply of parts on-hand. Most other companies saw this during Covid when "logistical issues" (really the greed of these businesses leading to inadequate insulation from supply chain disruption) led to shortages of almost every consumer good.
Economists seem to forget sometimes that money needs to be used for things other than passively making more money.
This is a weird take... Interest rates are at absurd rates right now.
https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
Only compared to recent prior rates. The full picture is that rates are final normalizing after being held absurdity low.
Finally I can put money into the bank and it actually yields a return, but everyone wants to borrow money for free.
Finally I can put money into the bank and it actually yields a return, but everyone wants to borrow money for free.
I'm putting off buying solar panels onto my roof because I know that the longer I wait the cheaper they'll get.
Unless you're planning on installing the panels yourself, the price is actually going up now because the labor component of the installation is growing faster than the equipment prices are declining. Furthermore, many utilities are trying to enact regressive metering policies that will make ROI nearly impossible to achieve over the life of the panels.
The best time to install was the year the IRA was signed into law. The second best time is now.
This all seems to assume I live in the USA which is not the case. Last time I had a solar panel company representative visit the vast majority of the cost was the equipment - the installation itself is rather quick. Obviously the price decrease is not going to last forever but so far it has been true. Also, this is just to highlight the fact that "deflation" does affect consumer behaviour in a negative way.
Cool story. Not sure how it's relevant.
Knowing that something will cost less in the future does affect consumer behaviour in a negative way. That's how it's relevant.
That's a gross oversimplification of consumer behavior. Consumers react differently to market changes for different types of goods.
There's probably a good reason the vast majority of economists agree that deflation is bad for this exact reason. It's not just my opinion - I'm not an economist and I doubt you're either.
Economists are pretty famous for fighting amongst themselves. The vast majority of economists don't agree on anything with each other.
The loudest economists tend to agree with each other. The ones whose views and supported policies happen to result in more wealth being funneled to capital holders. For some reason those people are the ones who get interviews on TV and articles published by major outlets. I wonder why that could be?
I'm not saying every "indie" economist on the Internet is valid as there's plenty of bad ones too. But the idea that deflation is terrible certainly deserves scrutiny. Just look around... Is the populace happy with the results of the current systems and policies?
To quote one of the most famous economists, Hayek, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design"
Not really. Many put off buying a house until it makes financial sense. If renting makes more sense (it does in many markets currently), you are going to continue to do that. Why buy something and deal with the hassle of ownership if you don't have to? As someone with an 80 year old house, I can tell you that renting was a hell of a lot easier.
It's also a lot more difficult to afford when the bank has no reason to lend to anyone. They can just sit on the money they already have and make a return risk free.