William Shatner on mortgages


I am once again reminded how expected returns is a critical concept in macroeconomics.  Circa 1985, you could expect to earn much higher returns putting money in a certificate of deposit, thus increasing the opportunity of buying a house back then.  No, you would not earn 12% on your money, but still we need to reckon with the higher opportunity cost of funds to calculate the true home purchase/mortgage cost at that time.


Sorry, I can't resist: KHAAAAANNNN!!

The $315K figure for the cost of the mortgage is barely any 1985 dollars, that's the cost over 30 years. So his purchasing power comment is innumerate.

He has a point, a good point. His math is not perfect but his point is still true. You can't argue against his point so you must denigrate his math.

His point is not even close to being true

No! His point is quite true, just not what you want to hear.

Yes! His point is mistaken, because math. It's a math point he's making and he's doing it wrong. Doesn't matter what any of us want to hear, his numbers don't add up.

You are intentionally dense. What he is saying is like someone saying "I have told you a million times not to jump off the roof". And instead of admitting it is a bad idea to jump off the roof you insist it must be a good idea because clearly he didn't tell us a million times i.e. "because math". You are intentionally blind to the truth because when you get up in the morning you ONLY get out of bed because you can disagree with someone on the internet. Your glee in nitpicking exc eeds your ability to see your error.

Is this a post on opportunity cost or expected returns? Today, what's the opportunity cost of not buying a house? On the other hand, what's the expected return on a $750,000 house? Damn! That's a problem of reliance on rising asset prices for prosperity. There's a reason the stock market has set records. At least overvalued stocks are liquid (until they aren't).

Sears stock in 1985 had a high "value" but today the "value" is greatly diminished.

The house I bought in 1985 had value for its protection from the elements and providing a degree of comfort while I was mostly away from the house. Today, the same house has suffered from the same entropy and lack of investment to reverse the rot, but I spend almost all my time in the house in sufficient comfort, so the value of the house is higher than in 1985. The price the town sets is about the same as in 1986 when I bought in real terms, but that price is defined objectively on mostly utility, and would be lower by the amount buyers would spend to bring it to present day "style".

Value is a concept that has changed creating since the 70s. Almost totally erased from "value" is utility.

Instead, value is defined by scarcity, so home "value" increases as utility per dollar goes down. The homeless have the housing with highest utility prr dollar, the lowest operating costs.

Note, my house is on a lot that seems to those criticize California housing should have a minimum of 15 houses, each of which should have 3 or more housing units. But that is impossible because I have no sewer service, and when built, not public water service, so with the soil, the ledge, and nearby wetlands, the lot can't handle the waste water from more than a half dozen people. The stream on the back edge of my land does not flow fast enough to handle piping a single house sewer waste into it, much less a dozen.

Thus, the high land price is based on the lack of sewer service, as a proxy for all the other anti-tax policies of the State. Ie, the utility of an acre of land in NH is much lower than the land in California cities, especially in California City, where water and sewer service allow greater utility, more houses per acre. Ie, my land is $100,000 per acre while land in California City with sewer service is less than half the price.

Minimum wage laws are enacted across borders. I live in Arizona; in Arizona we export most of our sediment to Tuscany and Greece. In both places the same labor is valued different. But the price of the sediment is only based on value. There is a minimum wage standard in Arizona that is set at the corporate level, i.e. small businesses are also subject to changes in the corporate structure of the bank they take loans from.

Fair or Market Value is exactly the amount that a knowledgeable, typically motivated buyer - unaffected by special financing amounts, or terms, services, fees, costs, or credits incurred in the market transaction - will pay.

Median house price isn't a good choice to compare on either. The median house in 85 was in a much more desirable location in most cities. They're closer to the center of cities and have increased in value much more than the current median house has.

A better comparison is: how hard is it to buy the median house in 85 was it vs how hard is it to buy *that same house* today?

If you do that math, I'd expect the 85 median house to cost far more today than the current median house. Maybe something like $600k. I'd be shocked if that's not much more expensive even using Shatner's flawed method.

The median house in 85 was in a much more desirable location in most cities. They're closer to the center of cities and have increased in value much more than the current median house has.

Nah. We don't all live in SF, DC and NYC. In other places, the outer suburbs and exurbs have grown the fastest since 1985, and that's where most of the big new houses are. The distance to the central city matters less since a smaller and smaller fraction of a metro area's jobs are in the core. Consider the exurb of Naperville, IL 30 miles west of Chicago. It has roughly tripled in size since 1985. From Wikipedia:

In a 2010 study assessing cities with populations exceeding 75,000, Naperville was ranked as the wealthiest city in the Midwest and the eleventh wealthiest in the nation. It was ranked among the nation's safest cities by USA Today and Business Insider. Naperville was voted the second-best place to live in the United States by Money magazine in 2006 and it was rated first on the list of best cities for early retirement in 2013 by Kiplinger. In 2015, it was ranked as one of the most educated large cities in America with populations over 50,000.

Judging by the very rapid growth, I don't think many Napervillians feel deprived by their inconvenient location.

Naperville may be growing, but why isn't comparing the same house more correct? Or rather, why does a house in Lincoln Park, Chicago cost most than one in Naperville? It's not just that some people are irrational and mistakenly value proximity to the city center.

For the wealthy people who want to be near downtown, there's a limited supply. For the wealthy people who don't, there are many choices -- Naperville, Hinsdale, Lake Forest, Glencoe, Highland Park, Wilmette, Winnetka, and a number of others. There are more wealthy people in the metro area who live outside Chicago than inside.

Absolutely - or to put it another way, what's the quality adjusted real house price over time?

That may seem absurdly complex, but there are serious differences, and even accounting for some of those would illustrate wild differences. Houses in the 50s had lots of land, but fewer bedrooms and only one bathroom. They were also closer to the city, but transport may have been harder. Houses today are smaller and typically further out, but come with more rooms and bathrooms, and much less land. If you like sunshine and a garden, the average house has become much worse in many cities. Traffic is worse in nearly all cases, and I'd bet that the average real commuting cost per km traveled has fallen substantially.

I know of cities in Australia where you'd argue there has been a real fall in the quality of the average house in the last 40 years, while prices have risen substantially, even before you talk about interest rates. And people intuitively know this too, which heavily influences local politics and zoning attitudes.

Median new-house size in the U.S. has about doubled since the 1950s. Check your data.

Also they were in the center of different cities than today; 1985 Manhattan is not the same place as 2019 Manhattan. There is really no way to compare 1985 and 2019 houses perfectly in terms of location because the world has changed so much that locations with exactly the same parameters don't exist anymore. You could compare houses in San Francisco in 1985 to a city of similar size today, but that comparison wouldn't take into account the special status San Francisco had in 1985 (and perhaps has even more today). Cities are pretty much unique, but not only among all the current cities, but also when compared their historical selves.

First, that 1985, 12% mortgage was (99%) likely refinanced to lower rates several times as mortgage rates declined over the decades after 1985.

Far better to investigate housing prices than total of 360 constant monthly payments. Then, compare period housing prices and median incomes.

Of course, 2019 dollars are far less valuable than 1985. And, 3.8% interest results in much lower in cash payments than 12%. Think time value of money, nominal rates, inflation.

In addition to accelerated, serial refinancings, industry standard durations for 30 year, fixed rate residential mortgage loans were 12 +/- years. So, aggregating 360 constant monthly payments is unrealistic.

Aside from that, Shatner rules!

Captain Kirk is climbing the mountain, why is he climbing the mountain ?

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Ignores option value associated with mortgages from ability to prepay - if rates go down from 12% (as they did), you can refinance and lower your payment. Usually lower rates also drive up home values, so you win both ways (home appreciates, payments decline). Conversely if today's low rates go up, payments stay unchanged but home value likely declines. 30 year pre-payable fixed rate mortgages are a pretty unique financial asset available in the US only because of the FHA. They're an amazing deal in falling rate environment like US 1980-2005.

" Usually lower rates also drive up home values"... Except when they do not.

Mortgage rates halved from 7/2006 to 7/2012 and home prices dropped by 30%.

Mortgage rates increased by 25% from 7/2003 to 7/2006 and home prices increased by 40%.

Mortgage rates increased by 12% from 7/93 to 7/2000 and home prices increased by 35%,


I doubt anyone who took out a mortgage at 12% actually paid that much for the full loan term. Most probably refinanced within 4-5 years.

Of course people refinanced but it was a hell of an interest rate to pay when you're just starting out in life. Of course, we baby boomers had everything handed to us on a silver platter :-'

12 percent is a funny number to pick, because California did sell a 30 year bond for 11.97 that year. Strange days. I remember stories of people walking into the Federal Building with pockets stuffed with cash to buy 30 year Treasuries(*). Of course not everyone was in a position to do that

Unlikely to be seen again anytime soon.

* - precocious small child that I was

When Thatcher gave British council house tenants "the right to buy" there were, according to a chap we knew who worked in our local council housing office, three types of buyer.
(i) One would walk in, say he'd like to buy his house, and could he arrange a mortgage with the council?
(ii) Another would walk in, say he'd like to buy his house, and that he planned to arrange a mortgage with the Halifax Building Society.
(iii) The third would walk in, say he'd like to buy his house, and hand over a plastic bag stuffed with cash.

I don't think that is so simple. 1985 was well in Reagan's Morning in America. Meanwhile, we are facing the aftermath of the greatest crisis since the Depression and living standards have s

I don't think that is so simple. 1985 was well in Reagan's Morning in America. Meanwhile, we are facing the aftermath of the greatest crisis since the Depression and living standards have stagnated.

You can’t compare the yield on the CD, which has a fixed face value, with the yield on the house, which has a face value that rises with inflation.

The CD is an implicit position in unexpected disinflation. It’s not better or worse than the position on the house. It’s just a different bet.

Also, inflation is affecting the payments on the mortgage, and inflation was much higher back in the 80s. My parents had a huge (for the times) mortgage payment when they bought their first house; after five years of inflation the same nominal payment was much less huge compared to Dad's earnings. A 21st century loan on the same house would have a smaller initial payment, but the payment would shrink (inflate) much more slowly.

OK, Shatner...

(Sounds better than OK, Silent I guess?)

No, unless I'm wrong, it's ridiculous isn't it? Even net of PPP over time as noted in first comment.

The person with an salary to what would be required to buy a $315k home in 2019 would have an income of $63k assuming Loan to Income of 5x (which is a high ratio). If you follow his PPP calculation, they'd have an income of $26k in 1985.

So why is such a person with such an income then getting a 30 year mortgage at 12% interest on an $85k property and repaying it over 30 years for the full amount of interest? Assuming compound interest isn't offset by a real terms decrease against inflation, no high early repayment fees. Am I missing something here about 1985 mortgages?

I actually did get a mortgage around that time. Adjustable rate, nominally 12% but "bought down" to 9.5% as a teaser. Rates proceeded to fall and I never had to pay 12%. People with fixed rates went through series of refinancing, but with an adjustable you could just ride it down.

Strange times.

Me too.

We traded up in September 1984. We had a material capital gain on a small house we had purchased in September 1979.

We had a choice of a 14%, 30 year fixed rate or a 10.25% one-year adjustable (index was 250 bp above the one-year UST rate). We opted for the ARM. Only one year of the 30 (we a rarity: still in the House 35 years later), we experienced a manageable rise in rate.

If we had chosen the fixed rate, as many did, we would have refinanced several times.

For years, bankers and mortgage bankers enjoyed large fee revenues from mortgage refinancing. I have wondered whether the loss of refinancing volume may have been a factor in spurring the housing bubble/run-up to the October 2008 financial catastrophe.

The cost of money isn’t the cost of housing. Period. Back to fundamentals of economics, folks. Money and housing (or any other basket of durable asset and long-term consumption good) are complementary goods. Analyze appropriately from there.

Tend toward 'complementary goods'.
The tending toward can take 30 years with a distorted pricing system.

House is that house we bought in Detroit 30 years ago? The house bought in Chicago 10 years ago? The condo bought in NYC 2 years ago?

How does this compare with the argument made frequently today that "it's cheaper than ever today for the government to invest in infrastructure because interest rates are low". Isn't that the same argument that Shatner is making in respect of housing? I would have thought that if the markets are correctly pricing expected future inflation (and thus real interest rates), the total expected *real* cost of infrastructure or housing is not dependent on current nominal borrowing rates.

Ok, Bill. Now do the cost of education and healthcare.

Define healthcare inflation.

The costs of almost every medication available in 1985 is down dramatically in real terms. The surgeons fees for every major surgical procedure available in 1985 are down in real terms as are the reimbursements for office visits. Surgeons incomes are up because they are much, much more efficient compared to surgeons of 1985. Cases done per hour are up 2-4 times depending on specialty with much improved outcomes.

An increase in total healthcare spending does not equal inflation. We just “do” a lot more healthcare; and yes, quite a bit of it is wasteful- particularly hospital based care and administrative overhead.We also spend a lot more on software in total, but no one is running around talking about software inflation.

Has anyone asked Captain Picard what he thinks? (Though we should probably ask Janeway too, just for gender balance ...)

He tells us about a house costing $85k in 1985 and compares it one costing $315k now, but then he compares the $315k in 1985 to its value now, which he says is around $765k. Sounds about right , but the $85k is worth about $207k now. He’s pretty confused.

Isn’t his point to push back on those millennials who talk about how hard it is now? They say, “You could buy a decent house for X times the median income and now it’s 2x*.” But the payments were the same due to high interest rates so it was equally hard to make your monthly nut.

Obviously, it was also true that someone who took out one of those 12% made out like a bandit as rates fell and prices rose.

* for discussion purposes if you want to run the number feel free.

John gets it. Attaboy John, you're the first one.

But I'm sorry, we can't say anything positive about Today, because Orange Man Bad. Now -- back to how terrible everything is!

Yes, a millennial will need some heavy-duty inflation after they buy to do as well.

No one did 30 year mortgages in 1985 though.

"Ok math whiz: a $85k 30 year mortgage with 12% interest in 1985 actual total cost was $315k."

Surely one must correct this to calculate the present value of those future payments?? This "math whiz" appears to have just added up all the payments to calculate that #315k total. As if anyone would be willing to pay a dollar today for a dollar to be received 30 years from now.

Surely the concept of "present value" is relevant here?

"More than 50 years ago, Caltrans purchased roughly 500 homes under threat of eminent domain within the planned right-of-way for the anticipated construction of the I-710 freeway (linking Monterey Park to Pasadena)...Caltrans finally decided to sell those homes once it became clear the alignment would not be utilized..."

"...several current tenants will be able to purchase their properties back from Caltrans for the same price Caltrans paid in 1963 — which range from the mid-$20,000’s to mid-$30,000’s. Caltrans had attempted to sell the homes back at the same price, but adjusted for inflation, which brought the prices up to several hundred thousand dollars (which was still dramatically below their fair market value of over $1 million). The court disagreed with Caltrans’ inflation adjustment, concluding that the homes should be offered back at the original acquisition price – no more, no less..."


Wait, William Shatner didn't know how much $100.00 was back in 1984: https://www.youtube.com/watch?v=S-SqHfckym8

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