If ‘free money’ broke housing before, a 50-year mortgage will finish the job
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Slip out the back, Jack!
Make a new plan, Stan.
You don’t need to be coy, Roy.
Just get yourself free.
As Paul Simon sang in the song “50 Ways to Leave Your Lover,” just change the word “Lover” to “50-Year Mortgage,” and you have some really good advice. Being free of too much debt is key.
The 50-year mortgage, in my opinion, is a gimmick that, if put into place, would hurt the consumer and possibly the economy on a long-term basis.
The danger, of course, is that when debt feels cheap and the horizon looks endless, people convince themselves the rules don’t apply to them. I watched that mindset take hold once before.
In 2005, we went out to dinner with my wife’s hairdresser and her handyman husband. In the car, he told us that he purchased four homes to flip. I later went to list a home at a ritzy country club. The sellers were upset with the number I gave them on two estate homes they recently closed on. The couple wanted a $300,000 profit on a million-dollar purchase. After all, their friends made $150,000 on a home they flipped, and they were surely smarter than them.
Yet another one never looked up from her papers while looking at an investment condo. When I told her there is a commission and title costs on the flip side, let alone carrying costs if it didn’t sell right away, I got scolded. She had just graduated from a real estate university, and if I wouldn’t help her, she would find someone who would. I passed on that one.
Free money is tempting
Fast-forward, and 2006–2014 was more of a real estate depression than a Great Recession in South Florida. Having survived through the Big Short market, I saw firsthand how consumers, if given the chance at free money, will take it — even to their own detriment. That market, and the free money with it, caused ghastly harm to the economy. I had hundreds of people doing short sales with the fantasy of getting free from their ball-and-chain house and into a rental.
Dodd-Frank corrected much of that. People will choose to save a few hundred dollars and buy into a 50-year mortgage. Many of them are the same people who will take on a college education with hundreds of thousands in debt. Fifty-year mortgages will let people take risks to get into housing when they shouldn’t.
The good news is that inventory is starting to taper down and, in some cases, reverse the other way. Plus, 6% mortgage rates have been the sweet spot where the buyer can afford a home or move on from their precious 3% to 4% rate.” Furthermore, home prices are not going up with inflation. Home purchases have been the outlier of the economy since everything from auto parts to food to clothing has gone up in double digits. Put another way, resale homes are depreciating in real time.
The one caveat regarding 6% mortgage rates being the magic number where the consumer pulls the trigger is the cost to the consumer on other items affected by inflation. Does 6% become too pricey because other costs are eating into that affordability model? Five percent might have to be the new 6% tipping point.
The Fed, dealing with inflation, might not be able to lower rates further, because they need tools to combat inflation. Thus, the need for the 50-year mortgage gimmick.
If you see it, hop off the bus, Gus — and make sure to keep yourself free.
Jeff Lichtenstein is the CEO & Broker of Echo Fine Properties – Palm Beach Gardens.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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