ARMs tempt buyers with low initial payments, but they are a gamble. You're betting that your income will rise, rates will fall, or home values will increase before your payment jumps significantly. This risk is often downplayed by lenders who are incentivized to sell loans.
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Home ownership is reframed as a high-risk financial instrument, not a safe investment. A mortgage constitutes a 5-to-1 levered, highly concentrated, non-cash-flowing bet on the economic future of a single zip code, making it far riskier than a diversified public market portfolio.
The proposal of a 50-year mortgage is not a solution but a symptom of a deeply unhealthy economy. It's like giving insulin to a diabetic: it manages the immediate problem (unaffordable payments) without addressing the root cause (a severe lack of housing supply and inflationary pressures).
A common misconception is that Fed rate cuts lower all borrowing costs. However, aggressive short-term cuts can signal future inflation, causing the 10-year Treasury yield to rise. This increases long-term rates for mortgages and corporate debt, counteracting the intended economic stimulus.
Whether one owns a home is a primary determinant of their perception of affordability. Homeowners with fixed mortgages feel more secure due to locked-in housing costs and accumulated equity. Renters, however, face constant rent increases and lack this wealth-building asset, making them feel far more financially insecure.
Fed rate cuts primarily lower short-term yields. If long-term yields remain high or rise, this steepens the curve. Because mortgage rates track these longer yields, they can actually increase, creating a headwind for housing affordability despite an easing monetary policy.
The bond market is a better indicator for mortgage rates than the Fed. The current spread between 5-year and 10-year Treasury notes implies that investors expect the 5-year note's yield to be 100 basis points higher in five years than it is today. Since mortgage rates are closely tied to these yields, this suggests a potential for higher, not lower, mortgage rates in the medium term.
The gap between existing mortgage rates (under 4.25%) and new rates (over 6.25%) is over 200 basis points. This spread, which disincentivizes homeowners from selling, has persisted for three consecutive years. Historically, the gap only exceeded 100 basis points for a total of eight quarters over the past four decades, making the current situation a major anomaly.
A mortgage is a revolutionary abstract concept. It allows you to create a narrative about your financial viability thirty years into the future and, based on that story, borrow from that imagined future to acquire a real asset in the present. It turns time into a tradable commodity.
Extending mortgage terms doesn't solve housing affordability because it primarily boosts demand for a fixed supply of homes. This drives asset prices higher, as sellers adjust prices to match buyers' new monthly payment capacity. The historical example of Japan's housing bubble, fueled by 100-year mortgages, illustrates this danger.
Morgan Stanley analysts argue that mortgage rates follow the 5- and 10-year Treasury yields, not the Fed Funds rate. As evidence, they note that while the Fed has cut rates by 100 basis points over the past year, the average mortgage rate has actually increased by 25 basis points during the same period.