What is really a fair mortgage rate?

[Martinghoul]

Quote from Buzzed:

You first have to figure out the fair interest rate on savings accounts. Will it be the fictional 5%? If it is 5% then the mortgage rate needs to be over double the savings rate. Otherwise, there would be no gain by risking money in a loan compared to a guaranteed 5% in a savings account. Remember, there is no longer a federal reserve, therefore banks can no longer lend 7 times more than they have. The ratio is now 1:1.

The mortgage rate now needs to be higher than 10% to support a 5% savings rate. With a 7:1 ratio, to support a 5% savings rate, the mortgage rate only needs to be 1.43% to get a net gain of 5%.

10-20% is very realistic.

As I said in my post, the prevailing nominal interest rate has to be a function of a) productivity/population growth rate (use real GDP as a proxy); and b) rate of inflation (in our stylized case, the growth of money supply). Let's say it's 5%. How do you arrive at over double the savings rate? What's the basis for double? Why not triple or quadruple? Why not half the savings rate? You're applying a completely arbitrary multiplier for no good reason... In contrast, the number I have given, arnd 100 - 300 basis points over the main rate, has held in the oldest, best regulated and most well-functioning mtge mkt in the world, Denmark.

As to the rest, I am totally baffled. What does 7:1 have to do with anything? When rates were at 5% in the US, were mtges at 1.43%?

10-20% is utterly silly... Why would I ever take out a loan with a 10-20% interest in a stable economy where, in equilibrium, I can never earn more than 5%?

 

[morganist]

Quote from peilthetraveler:

To figure this out, you have to imagine that we are on the gold standard and there is no federal reserve to create interest rates. The only people that loan money are people that have money. No fractional reserve banking or any government interference.

So...you have $100k to loan to someone for a mortgage. Whats a fair interest rate that would make you want to loan money to someone that is competative with other people that would be loaning money.

Remember...we are only using gold & silver, so there is next to no inflation. Well maintained houses do not go up or down in value.

I would say between 10-20% depending on amortization and 20 years would be the absolute maximum amortization.

actually peil as a christian no interest is acceptable. remeber usury.

 

[peilthetraveler]

Quote from Martinghoul:


10-20% is utterly silly... Why would I ever take out a loan with a 10-20% interest in a stable economy where, in equilibrium, I can never earn more than 5%?

Imagine you want to buy a house for 1000 oz of gold. You pay 13 oz of gold per month rent right now. You find out that if you borrow 1000 oz of gold and pay it off over 15 years, you are paying about 17oz of gold per month. So you make that decision that its better to pay an extra 4 oz of gold per month and after 15 years, you no longer have a mortgage. If you decided to save your extra 4oz of gold per month, it would take about the same time (14.25 years or so) to save 1000g. So...do you save 4g per month and wait 14.25 years to buy your dream house? or do you pay 20% interest and move into your house tommorrow? I think most people will choose to pay the 20% interest.

 

[morganist]

Quote from peilthetraveler:

Imagine you want to buy a house for 1000 oz of gold. You pay 13 oz of gold per month rent right now. You find out that if you borrow 1000 oz of gold and pay it off over 15 years, you are paying about 17oz of gold per month. So you make that decision that its better to pay an extra 4 oz of gold per month and after 15 years, you no longer have a mortgage. If you decided to save your extra 4oz of gold per month, it would take about the same time (14.25 years or so) to save 1000g. So...do you save 4g per month and wait 14.25 years to buy your dream house? or do you pay 20% interest and move into your house tommorrow? I think most people will choose to pay the 20% interest.

peil peil peil. i have said it before and i will say it again. no interest.

 

[peilthetraveler]

Quote from pitz:


But if interest rates exceed gold supply growth, such will eventually result in a default, as the gold simply does not exist.

Ok...i still dont agree with you, but for a minute I am going to let you be right about this one just to prove a point.

Can you tell me any society in history where no citizen defaulted on a debt?

Maybe under this scenario if I told you that 20% of all borrowers defaulted you could finally admit that people would be paying 20% interest rates.

 

[pitz]

Quote from peilthetraveler:

Imagine you want to buy a house for 1000 oz of gold. You pay 13 oz of gold per month rent right now. You find out that if you borrow 1000 oz of gold and pay it off over 15 years, you are paying about 17oz of gold per month. So you make that decision that its better to pay an extra 4 oz of gold per month and after 15 years, you no longer have a mortgage. If you decided to save your extra 4oz of gold per month, it would take about the same time (14.25 years or so) to save 1000g. So...do you save 4g per month and wait 14.25 years to buy your dream house? or do you pay 20% interest and move into your house tommorrow? I think most people will choose to pay the 20% interest.

But where on earth does the gold come from to pay all this interest? I mean, let's say there are 1 trillion ounces of gold in the world, and all of it gets lent out to facilitate commerce. Loans are made over the period of 1 year, and then, must be entirely repaid in gold.

What is the maximum interest rate that can be charge against gold? 1-2%, of course -- the rate of growth in the gold supply. Once cannot pay back what does not exist, or cannot be earned.

Now, on a continuum, some loans will have higher interest rates than others, but since housing is such a large activity of the economy, it seems very unlikely that the gold interest rate could be sustainably higher than the rate of expansion of the money (ie: gold) supply.

Your example is slightly flawed, in that, you start with "pay 13 oz of gold a month as rent", which implies that a house could generate rents that provide its owner, a doubling in the amount of gold they own, in a mere 76 months, or 6.5 years. Of course, we know that this is simply impossible; the size of the gold money supply in an economy cannot possibly double in 6.5 years when gold is only being produced at 1-2%/year.

 

[pitz]

Can you tell me any society in history where no citizen defaulted on a debt?

Well, no, I can't. But if interest is set beyond the rate of economic growth and economic output, as expressed in gold, then default is not only a mathematical probability, but a mathematical certainty.

Sort of like the past decade with mortgages. There was no economic growth. There was only expansion in debt. Thus, the debt defaulted.

Maybe under this scenario if I told you that 20% of all borrowers defaulted you could finally admit that people would be paying 20% interest rates.

Certain types of lending could be at 20%, but the majority of collateral that is lent against, could not be. For instance, a typical household might have 90% of their debt today at a 5% 30-year fixed rate mortgage, and 10% of their debt at a 29.95% credit card, resulting in a blended interest rate of 7.495%, which may be manageable (or may not be....). But if you flip things around, I think we could agree that any lender foolish enough to try and extract a 29% rate of interest from all debt in the economy, an economy that is only seeing money supply growth of typically 7-8%/year, would result in default.

Since housing is the largest part of a typical consumer's balance sheet, rates charged against it could not deviate significantly from that of growth in the economy and monetary aggregates without inducing mass default.

 

[peilthetraveler]

Ok...time to put this baby to rest. I'm going to show you with evidence that high interest rates are possible. This website says interest rates for homes in the philippines is between 11%-16% (although I have personally seen it as high as 18% as early as last year) Those interest rates have been that high for at least 10 years.

http://www.asianhomes.biz/AsianHomes-Realty-Services/Lending_Banks.htm

The economy there has grown an average of 4.5% since 2001. Inflation for 2009 was less than 1%. Their public debt has shrank 20% since 2003.

http://www.indexmundi.com/philippines/public_debt.html

(Sorry about that bad link...they put $ instead of % for their public debt...obvious their debt is not 59 dollars, but you can confirm it at CIA factbook anyway)

So there you have it...A country with a 2% population growth, 11-16% average interest rates, low inflation of 1% , 4.5% GDP growth and a shrinking public debt since 2003(although to be fair it did increase from 2008-2009 by 1.8%, but thats not bad)

I believe mexico also has high mortgage rates (around 10% last I checked) but I havent researched their inflation, growth rates, debt. ect. but I believe it would probably be near the same.

 

[pitz]

Sure, you can have 20% interest rates, if the supply of money also is growing at 20%. We'll soon have that (or more) in the USA, at the rate that the presses have been running, and once foreigners start demanding goods and services from America in exchange for all the bonds that are outstanding.

But measured in something of constant value such as gold, a 20% interest rate is an impossibility.

USA once had 15% mortgage rates as well in the 1970s. In hindsight, it was an excellent time to buy, as, when monetary stability was restored in the 80s and 90s, the assets provided good returns.

 

[failed_trad3r]

gold is obviously in a bubble. it is essentially worthless, especially as gold bars. Shiny, but you cant even show it like necklaces and rings. The only thing keeping the price high is it priced in a currency thats in even a bigger bubble.