Thursday, July 7, 2011

Let's Make Mortgages More Like Car Leases

Let’s face it. Buying a house is way too expensive. A $500,000 mortgage amortized over 30 years at 4% costs $2378 per month. Who wants to pay that much? Car leases give us the answer.

With a car lease we recognize that a car still has some value after the end of its lease. The customer only has to pay enough to cover the difference between the car’s starting price and its value after the lease runs out.

This should work out even better for houses because they go up in value. Let’s be conservative and assume that houses will go up 10% over the next 3 years. Then a home buyer should only have to pay enough so that the amount owed on the house goes from $500,000 to $550,000 over 3 years. At 4% interest, this would only cost $343 per month!

The rising debt isn’t a problem because you can always sell the house to pay it off. Compared to the old type of mortgage where the payments are $2378, this saves over $2000 each month. This is the kind of innovation we need to keep house values rising.

(In case it’s not obvious, I’m not serious about this. I’m simultaneously mocking (1) over-emphasis on monthly cash flow, (2) car leases, and (3) the growing belief that house prices will rise indefinitely.)

12 comments:

  1. There's so much satire in there, you missed one:

    4. The belief that rising house prices are a desirable goal.

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  2. @Patrick: Good one. I guess rising house prices are good for those who plan to sell a house, but don't have any plans to live in one afterward.

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  3. Rising house prices are also a good way of transferring wealth from younger to older generations.

    Given our looming pension crisis, who wouldn't want that? <=sarcasm

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  4. I'm surprised that Wall Street hasn't created a product like this. I mean they can package the house leases into bonds, get a AAA rating and sell them to investors who will buy anything for a little bit more yield.

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  5. Michael, your assumption that the house value will go up 10% in three years is crazy. Recent history suggests that 10% in one year is more realistic.

    If you make the appreciation rate high enough, the lease will pay you to stay in your own home. That would make a good selling point! ;)

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  6. @Blitzer: If it weren't for the fact that I have children I'd be OK with transferring wealth from the young to the old :-)

    @CC: That's an interesting idea. Maybe there is a good way to package this idea that is less obvious than what I did.

    @Mike: I actually had to rejig my original numbers to make it so that the homeowner still had to pay instead of receiving money each month. Maybe I should have gone for an even more ridiculous example.

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  7. I foolishly didn't catch the satire and I was having a "WTF" moment (as the kids say) until I saw the disclaimer.

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  8. Got it. Excellent.
    My thought on house pricing? Take about 20% of median income, today, that's about $833/mo. At 4.5%, this will get you a $164K mortgage on a $200K house. This is the equilibrium point. We've overshot it on the way down. Over time, housing will track with inflation to income, which is a bit higher than CPI, not much. Think about it, if housing rose much faster, buyers would get squeezed out, slower, and people would move up to bigger houses.

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  9. To some extent this is already a reality. Many real estate investors expect astronomical returns year after year and are thus willing to accept negative cash flow when renting out their property, relying on the capital gain to make up for it. This can have the affect of pushing rental costs below the cost of borrowing the present value of a house/condo and this is happening in many markets in Canada.

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  10. What a stupid post - thanks for wasting three minutes of my life

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  11. @Anonymous: Was it not free enough for you?

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  12. Although what you got here is mostly a satire as already noted, I can agree with you that car loans have more value albeit at a shorter amortized period. Here's how: donate it to charity after you have maxed out its life. That way, you get a tax write-off from the government.

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