President Trump just proposed 50-year mortgage terms as a way to make housing more affordable.
Needless to say, I was very upset to see this because it is obvious Mr. Trump is not reading my blogs.
Let’s address all the reasons why this is so stupid. I will address what will bring down home prices once again – with an added twist.
1. Minimal Savings
The savings from going from a 30-year to a 50-year term are minimal – especially when compared to the savings garnered from going from a 15-year to a 30-year term.
I will use today’s rates and a $500,000 loan to illustrate my point.
- 15-Year Fixed at 5.625%: $4,119 per month (Principal and Interest)
- 30-Year Fixed at 6.125%: $3,038 per month (Principal and Interest)
- 50-Year Fixed at 6.125%: $2,769 per month (Principal and Interest)
A borrower saves $1,081 per month when taking a 30-year loan over a 15-year loan.
But a borrower only saves $269 per month by taking a 50-year loan.
That comparison is hugely flawed though because I am assuming the rates for a 50-year would be the same as 30-year rates.
50-year rates will likely be 3/8% to 1/2% HIGHER though because of the added risk for longer duration and less equity building.
A 50-year loan at a more likely 6.5% rate yields a payment of $2,903 per month, providing savings of only $135 per month.
That is hardly worth it – when taking on that much higher of an overall interest expense and building equity so much more slowly.
2. No equity building
Most people know that interest is “front-loaded” with fixed-rate mortgages, meaning the majority of one’s payment is mostly interest.
With today’s rates, the principal does not exceed the interest until year 20, in fact, with a 30-year mortgage. With a 50-year mortgage, the principal does not exceed the interest until year 40.
EQUITY AFTER 10 YEARS: Paying off $80,000 vs. $18,500
In my above example, 10 years of payments for the 30-year loan will pay off $80,000 of the loan amount.
But 10 years of payments for a 50-year loan will only pay off $18,500 of the loan amount.
So, yes, a 50-year mortgage holder is effectively just renting for ten years.
3. Subsidies always push up prices
Yes, a 50-year mortgage will make housing slightly more affordable… for about ten minutes. After that, however, home prices will simply adjust higher to reflect the subsidy – like I point out over and over in this blog.
Let’s assume our dumb government steps in to subsidize 50-year mortgages by backstopping artificially low rates (even though low rates still don’t provide that much savings).
Whatever savings borrowers do experience will just result in them bidding up home prices that much higher – like we see time and again.
So, yes, today’s homebuyers will benefit a bit. But at the expense of tomorrow’s homebuyers.
TLDR: 50-year mortgages will significantly increase interest costs for homebuyers, nearly eliminate equity building for the first 10 years, impose much higher risks on lenders, and end up increasing home prices – only to marginally benefit today’s crop of homebuyers.
What Will Make Housing More Affordable
- Lower development and building fees. Local governments have figured out they can slap developers with all kinds of fees that are not as politically damaging as taxes. These fees alone can add hundreds of thousands to the cost of a home.
- Fewer green mandates. These, too, add tens of thousands to the cost of many homes. Eliminating some of this burden would do wonders too.
- Less restrictive zoning. Excessive zoning restrictions in many markets would open up far more inventory.
- Less regulation. Regulations concerning everything from wages to work rules to allowable materials to permitting add enormous costs to housing.
- Less inflation. Yes, inventory shortages and artificially low rates pushed home costs, but let’s face it – the main thing that pushed up home prices is just old-fashioned inflation. Less inflation means lower home prices.
- Increasing capital gains exclusion from $500,000 to $1 million. This is the new twist that I saw touted on the internet today (that I should have thought of). But, a lot of married boomers and Xers would sell their homes if the capital gains exclusion were increased from $500,000 to $1 million (this is very reasonable, too, when we consider how much home prices have inflated since the $500,000 limit was set in 1997).
