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Buffett Says ‘No-Brainer’ to Get Mortgage to Short Rates


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“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”

 

http://www.bloomberg.com/news/2014-10-07/buffett-says-no-brainer-to-get-mortgage-to-short-rates.html

 

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The embedded option is what is most valuable IMHO. Rates go lower? Refi. Rates go up? Enjoy below market rates.

 

I take a real estate finance class as part of my MBA program and everyone is questioning the validity of the 30 year mortgage, whether it is still useful. I think from a consumer perspective it is inherently attractive. The class cites how people average only 7 years in their home, but I don't see how that makes the mortgage any less attractive of an instrument.

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A friend of mine from High School comes from a family that has owned a bank for several generations.  He is in line to be the bank president in a few years and knows the business really well.  This summer I asked him "what would be the market rate for a 30yr fixed mortgage if there was no government agency to purchase the paper from you?"  His response, "zero, there is no way we would ever make a 30y fixed loan."

 

It will be interesting to see if in 5/10 years we have a phenomenon of people in the US becoming less mobile because they do not want to give up their 4%ish loans and have to get a new one at 6-8%. 

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A friend of mine from High School comes from a family that has owned a bank for several generations.  He is in line to be the bank president in a few years and knows the business really well.  This summer I asked him "what would be the market rate for a 30yr fixed mortgage if there was no government agency to purchase the paper from you?"  His response, "zero, there is no way we would ever make a 30y fixed loan."

 

It will be interesting to see if in 5/10 years we have a phenomenon of people in the US becoming less mobile because they do not want to give up their 4%ish loans and have to get a new one at 6-8%.

That thought came to me as well. I was thinking that with home prices in metro areas going up faster / more relative to non-metro, it is not out of the realm of probabilities for people to lock into low mortgage rates for their non metro homes (weekend) and rent a room in the city. This model is fairly prevalent in Europe and Japan, for over 20 years. I personally know  mobile Professionals who have their dream homes in smaller towns. Often this is the primary inheritance as well for the kids.

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This summer I asked him "what would be the market rate for a 30yr fixed mortgage if there was no government agency to purchase the paper from you?"  His response, "zero, there is no way we would ever make a 30y fixed loan."

 

This is exactly why congress can't figure out how to get rid of Freddie and Fannie. 

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Here is a scenario...

 

Say you already have a 100k 30-yr FRM at 3.5%.  Now 30-yr FRMs are 8%.  If you want to sell your current place and buy a new one for 150k, is there a way to transfer the mortgage from the existing house to the new one?

 

So, can you sell the 100k house and take that money and put it into the 150k and take out a loan at the new 8% rate for the remaining 50k?  Or, would you have to take out a new 150k loan at 8%?

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Here is a scenario...

 

Say you already have a 100k 30-yr FRM at 3.5%.  Now 30-yr FRMs are 8%.  If you want to sell your current place and buy a new one for 150k, is there a way to transfer the mortgage from the existing house to the new one?

 

So, can you sell the 100k house and take that money and put it into the 150k and take out a loan at the new 8% rate for the remaining 50k?  Or, would you have to take out a new 150k loan at 8%?

 

Lenders are dealing with two different risk profiles here.  If you are not owning the previous house, why any lender will allow you keep the older loan? You would have to take 150K at 8%.

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i feel the point of 30-yr mortgage is that it allows me the maximum leverage /minimal monthly payment to buy the bigger house now. Even if i would be selling the house 5 or 7 years later, it's beneficial to get 30-year loan now which allow me the maximum leverage at a low cost.  If rate go higher when I buy a new house 7 years later, I can get a shorter-term loan, perhaps paying the same interest rate i am paying now, but by then I would have had more equity in the house and can pay a bigger down payment.

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It blows my mind that anyone would commit to a 30 year locked in interest rate.  The odds of that being profitable in 5 years, let alone 20 or 30 years is Nil.  Only in the US.  Our longest locked in, in Canada is 10 years at much much higher rates than a 5 year. 

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Isn`t Buffet saying with this that he expects higher inflation going forward?

I like Buffet, but his macro predictions where not pretty good in the past if i remember correctly.

 

I have not heard Buffett say that he is expecting higher inflation ahead.

 

My interpretation of him promoting a 30 year (or longer term if available) mortgage is "let the market pay for the equity in your home, versus you paying out of pocket". With the reset in the recent crisis, we are starting from depressed valuations. Plus, if you diligently invest the delta from lower mortgages in equities, you'll do fine. God forbid, if you beat the stock market index by 2 plus %, you will own your home plus a hell a lot more in 30 years!

 

Berkshire's bets into real estate (BHHS, paint, brick, Clayton etc.) is all about this.

 

 

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Isn`t Buffet saying with this that he expects higher inflation going forward?

I like Buffet, but his macro predictions where not pretty good in the past if i remember correctly.

 

I have not heard Buffett say that he is expecting higher inflation ahead.

 

 

But shorting rates is that kind of bet or not? When house prices don`t go up but down and your income is not growing its not a very good idea to do it. Taking on a mortgage to invest it in the stock market is playing with the risk curve and can get you deeply into trouble. Ask the japanese how good this idea worked over the last 25 years. (double whammy here, house prices fall and stock market, too.)

I don`t think the us will go that route, but you should never ignore the possibility of it. So in my view this bet only makes sense in a inflationary world, so in the end it is a bet on inflation. So long as you understand what you are doing go for it, but always know the risks :).

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Here is a scenario...

 

Say you already have a 100k 30-yr FRM at 3.5%.  Now 30-yr FRMs are 8%.  If you want to sell your current place and buy a new one for 150k, is there a way to transfer the mortgage from the existing house to the new one?

 

So, can you sell the 100k house and take that money and put it into the 150k and take out a loan at the new 8% rate for the remaining 50k?  Or, would you have to take out a new 150k loan at 8%?

 

In this scenerio, housing prices would typically have come down (unless you're far into the 30yr mortgage, in which case, probably not worth worring about).  That actually provides for even more lock-in on your current home, since you might have lost your equity.  Let's say, though, that housing has gone through tremendous inflation in that time somehow, or you're relocating somewhere much cheaper.  I think it is possible to simply keep the old home.  Not technically allowed on typical contracts, but it's very difficult for the bank to tell (I think), unless you're going to the same local branch for your new loan.  Even then they might not care because the loan could have been sold.

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For many of the members on this form, increasing rates on mortgages might put us in a better position to buy than lower rates.

 

As the rates on mortgages go up, the price of housing will adjust downward -- but, importantly, the percentage required as a down payment (20%) will remain the same. Thus, the opportunity cost of investing in housing (based on locking up capital for a down payment) for many members on this forum will go down quite a bit.

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For many of the members on this form, increasing rates on mortgages might put us in a better position to buy than lower rates.

 

For many members of this forum renting is probably the best option. I would only buy a house to reduce risk of doing something stupid with the portfolio, but then only when its a small part of my networth (and of course without a mortgage). The average family buys a big mac mansion and in doing so has paved the path to a wealthless future because they can`t afford to save more money and are stuck to the location (I don`t know how high the switching costs in the US are, but in germany you pay more than 10% transaction costs when buying a house). I am pretty sure that a cheap mortgage is counterproductive for them.

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For many of the members on this form, increasing rates on mortgages might put us in a better position to buy than lower rates.

 

For many members of this forum renting is probably the best option. I would only buy a house to reduce risk of doing something stupid with the portfolio, but then only when its a small part of my networth (and of course without a mortgage). The average family buys a big mac mansion and in doing so has paved the path to a wealthless future because they can`t afford to save more money and are stuck to the location (I don`t know how high the switching costs in the US are, but in germany you pay more than 10% transaction costs when buying a house). I am pretty sure that a cheap mortgage is counterproductive for them.

 

This has been rehashed several times on this board, but I wanted to comment here that what you're saying is true only if you have a purely economic analysis of home ownership.  For me, renting was such an enormous pain in the ass compared to owning my home, with the added control, freedom to be able to do what I want, and peace of mind.

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It blows my mind that anyone would commit to a 30 year locked in interest rate.  The odds of that being profitable in 5 years, let alone 20 or 30 years is Nil.  Only in the US.  Our longest locked in, in Canada is 10 years at much much higher rates than a 5 year.

 

Banks aren't making these loans, they're originating them then selling them to the US government.  Based on a cursory glance at a number of banks they aren't holding anything on their balance sheet past 10-15 years at the most.  Almost everything is dumped on the US Gov.  The government is the real patsy here, they're subsidizing the housing market, but they have been all along.

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It blows my mind that anyone would commit to a 30 year locked in interest rate.  The odds of that being profitable in 5 years, let alone 20 or 30 years is Nil.  Only in the US.  Our longest locked in, in Canada is 10 years at much much higher rates than a 5 year.

 

Yes, our 5-yr is at 2.75% or something, then the typical 10-year is at 4.6% or something. By some fluke/stroke of luck, I am currently locking into a 10-year at 3.6% which for Canada is a steal. (I think the rate has already move up to 3.8% or something - this is Desjardins). In any case, you are usually talking mid to upper 4s when the 5 year is below 3% which is not great.

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It blows my mind that anyone would commit to a 30 year locked in interest rate.  The odds of that being profitable in 5 years, let alone 20 or 30 years is Nil.  Only in the US.  Our longest locked in, in Canada is 10 years at much much higher rates than a 5 year.

 

Yes, our 5-yr is at 2.75% or something, then the typical 10-year is at 4.6% or something. By some fluke/stroke of luck, I am currently locking into a 10-year at 3.6% which for Canada is a steal. (I think the rate has already move up to 3.8% or something - this is Desjardins). In any case, you are usually talking mid to upper 4s when the 5 year is below 3% which is not great.

 

Hi Mungerville,

 

Why are those rates you are talking about so different from what I see on Desjardins website? http://www.desjardins.com/ca/rates-returns/financing/mortgage-loans/

 

Their website lists the 10 year fixed rate mortgage at 6.75%

 

 

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For many of the members on this form, increasing rates on mortgages might put us in a better position to buy than lower rates.

 

As the rates on mortgages go up, the price of housing will adjust downward -- but, importantly, the percentage required as a down payment (20%) will remain the same. Thus, the opportunity cost of investing in housing (based on locking up capital for a down payment) for many members on this forum will go down quite a bit.

 

It seems to be a common assumption that increasing mortgage rates will lead to lower house prices, but recent history does not support this seemingly obvious conclusion. Take a look at the following article from Forbes: http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/. About midway, there is a table that lists the six instances since 1976 when mortgage rates increased by one percent or more; in every case, house prices -- as measured by the FHFA index -- increased during the period of increasing rates. Maybe the next time will be different, but given the historical data, it won't be a surprise if house prices continue rising as mortgage rates increase.

 

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Interesting counterpoint. Thanks for bringing that to our attention.

 

I'd note that there are external factors in the last three examples he provides, two in the dot-com boom and one in the housing boom, but it's interesting data nonetheless.

 

I suppose that if mortgage rates increase, and all else remains equal, then housing prices should fall. On the other hand, if mortgage rates increase as a result of an economic boom, then housing prices would increase as well.

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For many of the members on this form, increasing rates on mortgages might put us in a better position to buy than lower rates.

 

As the rates on mortgages go up, the price of housing will adjust downward -- but, importantly, the percentage required as a down payment (20%) will remain the same. Thus, the opportunity cost of investing in housing (based on locking up capital for a down payment) for many members on this forum will go down quite a bit.

 

It seems to be a common assumption that increasing mortgage rates will lead to lower house prices, but recent history does not support this seemingly obvious conclusion. Take a look at the following article from Forbes: http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/. About midway, there is a table that lists the six instances since 1976 when mortgage rates increased by one percent or more; in every case, house prices -- as measured by the FHFA index -- increased during the period of increasing rates. Maybe the next time will be different, but given the historical data, it won't be a surprise if house prices continue rising as mortgage rates increase.

 

I could have sworn that values decreased a bit in the late 70s based on some discussions I had.  Probably a more local thing then—so remember when dealing with averages, you don’t want to drown in a pool with an average depth of 3ft.  There is an amount of stickiness, but this will depend on the rapidity of the interest rate change and a lot of other factors.  Pace of homebuying certainly changes—so if you are in a position where you *need* to sell, that’s where the downside comes in.

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Why are those rates you are talking about so different from what I see on Desjardins website?

 

Desjardings site shows "posted bank rates". They are negotiable. Use a mortgage broker if you hate haggling.

 

Bank rates vs. broker rates

http://www.mortgagebrokers.ca/mortgage-rates/

 

Is this common in Canada?  Mortgages in the US isn't like buying a car where the sticker price is 6% but if you're good you can talk them down to 3.5%.  From my experience rates tend to reflect credit worthiness.  If you have perfect credit you can get the best rates, if you have bad credit, or things the bank doesn't like then they won't offer the best rate.

 

I have a friend who was a mortgage broker about 10 years ago, I should ask him if he was haggling for the best rates for his clients.  This is fascinating.

 

Regarding shorter term loans.  In the US it's difficult to get a loan in an unusual length.  I've done it twice, a 20 year loan and a 12 year loan.  Rates fell on a curve, so the 13 year was slightly more than a 12 etc, but when doing this I limited who I could work with.  Most places just want to push through conforming volume. 

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