What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house.
The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do, but I’m happy to take the loan, especially since a side-effect is having a place to live.
> What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house [...] The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do,
Such questions deserve answers.
There is a lot that I skipped over, not wanting to get into the weeds of economic theory and start more arguments about whether the Fed controls rates or whether markets do (orthodox theory says markets control real rates and the fed only controls nominal rates, and thus inflation), and how savings demands respond to interest rates, and whether mortgages are risk free rates or not.
All of that complicates the simple picture I painted, but I think that picture is basically correct.
Suffice it to say that in terms of risk-free rates, the creditor's alternative is to buy a TIPS -- inflation protected bond -- which currently yields -1%
So we are living in a very low interest rate world right now.
Given that most likely your mortgage is government guaranteed (what mortgage isn't?) the entirety of the 3% you are paying is just as an inflation hedge plus some risk of pre-payment -- again, I have no idea what kind of points you have and the specific terms of the loan.
If inflation was believed to be zero, you could probably get the same mortgage for less than 1%, maybe even 0%.
We live in a world with very low real rates, but that does not mean that creditors don't take inflation risk into account.
> Suffice it to say that in terms of risk-free rates, the creditor's alternative is to buy a TIPS -- inflation protected bond -- which currently yields -1%
TIPS have a yield that is referenced to the CPI (attempting to present a real yield), not a yield expressed in nominal dollars, so direct comparisons against mortgage rates (inherently nominal yield) are not very productive.
The close equivalent to the 30YR mortgage rate is either the 10-year Treasury (currently yielding ~+1.6%) or, if you insist on matching maturities, the 30-year (currently yielding ~+2.0%)
So, whatever risk premium the lender is demanding on a 0-points, 30-year fixed mortgage, it's a maximum of 1.4% (3.0%-1.6%). As a borrower, I'll happily take that deal.
> What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house.
that's canceled out by prices being higher because every other buyer has access to the same rates. Your monthly payments works out to be the same in the end because everybody bids up to the max they can afford.
That 3% fixed interest rate isn't a real market rate. Most of those mortgages are purchased by Fannie Mae and Freddie Mac. Those companies are too big to fail and sponsored by the Federal government. If they went away then 30 fixed mortgages would barely even be available, or at least the interest rates would be far higher.
The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do, but I’m happy to take the loan, especially since a side-effect is having a place to live.