Written by Phillip Braunstein
Over the past month, big banks and mortgage companies have been laying off their loan agents in large numbers. The WSJ reports that this is due to the increase in home mortgage interest rates climbing toward 4.75%. This increase has allegedly deterred new home buyers and thus decreased demand for home purchases. But is it really the case that an interest rate bump of 1% over the past 6-10 months has squeezed the demand for home purchases and subsequently forced banks to lay off thousands of mortgage brokers—2,300 mortgage jobs were terminated 3 weeks ago at Wells.
I think there’s another undercurrent at work besides a rising interest rate, and I think it has a lot to do with the current generation of 1st time homebuyers who have lived through the recession and seen the crippling financial implications of debt and its corollary in form of a home mortgage. This generation of 27-36 year olds who would traditionally be the buyers who would need to borrow money to complete their first purchase. Many of my friends have the 20% down payment for a home around $1,500,000. Many of them would like to buy a home for their family and live the dream. The real deterrent is the fact that even though rates are low, the current generation of 1st time home buyers are reluctant to pay the $400,097.45 in interest over the course of a 15 year fully amortized loan of $1,000,000. And that doesn’t include the other costs associated with home ownership such as the 1.25% in annual property taxes, insurance, maintenance, etc.
It’s not the fact that interest rates have increased to 4.75%- since they are still at historic lows- it’s the fact that the 1st time buyers are skeptical of taking out a mortgage for their residence. They are asking why should I borrow money, pay interest, when I can just rent and not have the debt burden? For this same reason, the rental market has increased rapidly over the past 5 years and continues to expand.
Although the idea of a home mortgage to stretch your purchase for a nicer home to live for you and your family is commonplace in the U.S., it’s a foreign concept in several other countries. In China for example, there was no home mortgage market 5-10 years ago. If you wanted to buy a home or a condo, you would pay for it all cash. If you don’t have enough to afford it, you don’t buy it. It’s the same in several other Asian countries, and some Latin American countries, as well.
Many readers might shrug this off, and say “no biggie, everyone puts a mortgage on their house, don’t over-analyze the interest payments, you’ll make it up in value appreciation over the course of the 15 years.” Maybe. But the concept of “debt”, especially a debt the size required for a luxury home purchase, has a psychological impact on us.In fact, one German psychologist in the 1800s traced the original concept of “guilt,” Schuld in German, to the notion of “debt,” which is also Schuld in German. He goes on to say that the origins of our civilization revolve around the interaction of debt and guilt. For example, the earliest bartering and trading required that some goods be borrowed or traded for others, and if debt was not paid back, the creditor’s only resource at that time in pre-civilization would be to hold the penalty of punishment over the borrower’s head if the debt was not re-paid. If a tribe of people were to travel to a neighboring port and want to buy animal furs for winter, but did not have sufficient goods to trade for them at the time, the borrower would have only the memory of potential pain-guilt-that would remain if the debt was not repaid. If it were not, the creditor would inflict real physical pain. Hence, the mental sense of guilt arose after centuries of humans learning to repay their debts to avoid physical punishment, and the relic of that physical torture is the mental qualm known as guilt, which is inextricably tied to debt, according to the German theory.
Home loan debt could be a much more complicated issue than the interest rate…
Phillip Braunstein is the broker/owner of Eklipse Real Estate and holds a Ph.D. from Boston College.