07-13-11 - Houses

Some rambling. I got to "mutual acceptance" on a house, so we're in inspection. It's very hard to stay logical, because it's all such a pain in the ass that I just want to get it over with, so I want to ignore any flaws found at this point. In all these kinds of scenarios, as a buyer you get trapped once you have invested a certain amount of time.

Mortgage brokers are just horrible lying crooks. They're very similar to used car salesman really. They're selling a product, and they could just be honest and fair and still make plenty of profit. But no, they want that profit, PLUS as much more as they can lie and steal from you. So mortgage brokers will take the market rate and then crank it up (and keep the difference for themselves). They'll secretly sneak more profit for themselves into all the little fees, every single line item fee for closing they try to inflate by another 25% or so and keep the profit. On each of these items you can fight them, it's pretty trivial you just say "hey this rate isn't very good I found a better one elsewhere" and the broker suddenly goes "oh, okay, I can adjust this.." , but it's just such a fucking sleazy ordeal.

And the worst thing is that mortgages are a generic commodity. After the broker issues it to you, it's just sold on the market (or maybe they're doing it on behalf of some big mortgage block). You're not actually getting customized service, it should just be like buying barrels of oil. But it's not because they're crooks.

And dealing with mainstream banks doesn't make it any better, in fact if anything it's worse because they just bold-facedly charge you over market rate while making absurd claims that it's worth paying them extra because of their "stability" or "integrity" or "reputation" or whatever.

Buying a house is one of those things like buying a car where the crooks try to sneak in little charges that you ignore because the overall purchase is so large. You think "the house is $500k what do I care about $1000 in fees". But of course that's retarded, the $1000 in ripping off is totally independent of the house purchase, the 500k for the house is a sunk cost and you have to choose to pay the $1000 extra or not.

The sick thing is that so many consumers are happy to let them get away with it. On the car advice forums you will constantly see smug retards giving advice like "oh the $1000 oil change is worth it, why would you cheap out and go to a discount place when you spent $100k on your car?" ; umm, no, fucking moron, just because the car is expensive doesn't make all the associated ripoffs okay. Similarly with a house, you get a lot of "it's a huge purchase why would you cheap out on your survey fee" ; umm, no.

Insurance has got to be the biggest scam in the world. So far as I can tell, in the real world, insurance works like this :

I pay them massive amounts of money to protect me in case something bad happens. When that bad thing happens, I get not only the misfortune of the bad event, but I also get the excruciating displeasure of having to fight a beaurocracy which is doing their best to screw me over and weasel their way out of paying the fair amount they owe me.

Title insurance is just insanely overpriced. This is from an article which is in *favor* of title insurance :

"According to the American Land Title Association, which represents insurers, about 5 cents of every dollar collected in premiums is paid out in claims"

I suppose there are types of insurance that are even more profitable for the insurer, but not many. (I imagine the insurance on movie stars and shit like that is pretty much free money for insurers).

I think I'm going to go with a 30 year fixed, but I'm sort of contemplating a 20 year fixed.

The interest rates are very close right now, so that's not a good reason to go 20 year. The reason I'm considering it is to front-load my interest payments. Right now while I'm employed I get maximum benefit from the mortgage interest deduction. In 10-15 years hopefully I'm not working full time and it doesn't help so much.

Amusingly, every real estate professional I talk to has absolutely no concept of how money works. My realtor told me that rather than paying off his mortgage early, he puts the money in T-bills and gets 2% for it. Umm, hello. Assuming your interest rate is more than 2%, you would get a better return by paying off debt. Paying off debt is just like making an investment at the rate of your debt.

More generally, even smart people believe that they can "get a better rate of return in the market rather than by paying off debt". LOL no, maybe yes sometimes, but on average, no, obviously not. Just think about it for a second.

Banks want to put money in home loans because it's a great way to get a return. If there were better places to put money, they would gladly put the money there instead. There may certainly be investments with higher return, but they also have higher risk, so the risk-adjusted rate of return is the same (actually in general it's worse).

There are of course exceptions; if you lock in a low home loan rate and then the market heats up, you want your money in the market. The biggest issue though is that money paid into your house is no longer liquid, while money in the market always has added utility due to its liquidity.

Inflation is a very complicated aspect of home buying that I don't see discussed much. For example, in the issue of "should I buy points" or not, you can find lots of calculators, but they are all full of shit because they don't count inflation ( one exception is here ). Inflation makes points much less desirable, because they make you pay more today (in valuable dollars) and less in the future (in shit-paper dollars). In fact inflation also greatly reduces the difference between 20 and 30 year loans.

400k loan
4.5% APR
3% inflation

30 years :

total payment = $729,626
inflation adj = $480,259

20 years :

total payment = $607,343
inflation adj = $455,985

lots of calculators will show you the 20 yr vs 30 yr numbers and you go "ZOMG $120k more" , but that 120k is way in the future when you can't buy a computer for $120k , so who cares? The difference in inflated dollars is tiny (this is due to the fact that mortgage rates are so close to inflation right now;

The longer loan term also has a lot of added value; if you have uncertainty about the inflation rate, then any unexpected spikes in inflation massively help the 30 year term. Also, you might die. If you die, early payments were just a waste of money.

Another thing I haven't seen mentioned much is that points (and APR variations in general) matter more when they are higher. The difference between 8% and 9% interest is much bigger than the difference between 1% and 2%.

eval (1.09)^^30 - (1.08)^^30 = 3.20502
eval (1.02)^^30 - (1.01)^^30 = 0.46351

So the lower rates are, the less you should care about getting low rates. (* this is not really applicable to mortgages, see comments)

If you're a gambler, it seems to me like a great time to take out a huge loan. Rates are low, risk of inflation in the future is high, prospects for other investments are poor. I guess the only big risk at the moment is the problem that home values are probably still about 25% too high even despite falling a lot, but it's very hard to really objectively price things when the market is bananas.


Ash said...

Insurance companies are mafia mobsters in sheep clothing. In the early 20th century, they used to send in their thugs to gather "protection" money from merchants, businessmen, shop owners and pretty much whoever that could be pushed to be squeezed an extra dime out of, they have just figured out a way to do it in a more civilized manner, except this time around the business model is being expanded to also cover ordinary citizens like us. The underlying philosophy and principles are pretty much the same.

Ash said...

P.S. FUCK brokers, dealers and whoever the fuck makes a living without possessing any respectable skill that benefits the society in one way or another. Bunch of low life mofos.

cbloom said...

Yeah, well, brokers/dealers in general sometimes do provide a service, like if they actually find you something that you can't find yourself.

But mortgages is a pretty sick case because it is literally a generic commodity. They can't find you a better one, it's fucking market rate. All they can do is rip you off and lie to you and claim they found you a better rate, but all they did was secretly charge you points and hide it in the fee structure.

Same thing with new car dealers. A fucking Toyota Camry is a boxed goods commodity. I know the market price. Just fucking selling it to me for market price and stop lieing and stealing. No I don't care about our "relationship".

It's pretty sick that we as consumers are so dumb that we accept this raping.

nothings said...

(1.09^^30 - 1.08^^30) / 1.08^^30 = 0.3185

(1.02^^30 - 1.01^^30) / 1.01^^30 = 0.3439

so it is more in absolute terms (divided by the initial amount), but less in relative terms (divided by the final amount)

cbloom said...

True; on realistic numbers though it's not really a significant factor

415k loan over 30 years, total payment : (non-inflation-adjusted)

4.5% : 756,987.86
4.6% : 765,890.69

8.5% : 1,148,756.75
8.6% : 1,159,361.51

$9k difference in the first case, 10.6 in the second.

nothings said...

But 9K is still a larger fraction of 750K than 11K out of 1150K.

Whether you want to be looking at absolute or relative depends on the context, obviously. I just wanted to make it clear that it is different depending on that.

Brian said...

I don't think the compound interest formula applies. Unless you have worse than an interest only loan, you aren't allowing the interest to compound, so the exponential formulas don't apply.

cbloom said...

"Unless you have worse than an interest only loan, you aren't allowing the interest to compound, so the exponential formulas don't apply."

Uh, yeah, you're right. It's complicated actually but the end answer is that you're right.

Total payment is proportional to N(R-1)*R^N / (R^N - 1)

For R low (close to 1), this behaves like R^N (exponential)

For R large, it's linear like N(R-1)

You can see this easily either by looking at the limits mathematically, or you can see it by graphing the function and just looking at the shape.

It looks to me like for APR over 7% or so it's very linear. Under 3% it's trying to look like an exponential (but doesn't really make it until APR goes negative), and in between it's a transition.

The linearity at high R definitely squashes the runaway that is the main characteristic of an exponential, and overall the shape is definitely more linear than exponential.

Brian said...
This comment has been removed by the author.
Brian said...

Deleted previous comment... Our two answers are the same. r^n is linear near 1. Let r=1+a at the limit where a->0. (1+a)^n=1+an for small a...

cbloom said...

No, look at the graph, it really is exponential for r small (or at least super-linear). Obviously if you look close enough *everything* is linear, so for r very small it's linear again.

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