The hidden costs of taking cash out of your home

Nearly 60% of cash-out refinancings in 2018 came with higher interest rates (WSJ)

The recent WSJ article on American consumers refinancing at higher rates to take equity out of their home is yet another indication of the product-market mismatch in residential real estate financing.

Paul Thompson, the particular consumer in the piece, replaced his five year-old 4% mortgage with a 4.625% mortgage, taking out $30,000 in the process.  Some back-of-the-envelope calculation show that Paul will be paying $146,530 over the life of the new loan for the opportunity to take out $30,000 in equity.  I didn't account for time value of money or mortgage interest deductibility, but it seems that Paul will need a period of macroeconomic hyperinflation for this to make sense financially.

Showing my work (assumptions)

• He initially took out $350,000 for 30 years; total payments would have been $601,543
• Assuming 60 periods in, he would have paid down $33,433 in principal and $66,824 in interest (totaling $100,257)
• Since he took out $30,000 in equity, I'm further assuming the new mortgage balance will be $350,000
• He will have total principal and interest payments of $647,816 for his new loan.
• [New Loan: $647,816] - ([Old Loan: $601,543] - [Old Loan Paid Down: $100,257]) = $146,530

A little perspective please (when it comes to Millennial housing preferences)

Do half of all millennial home buyers really view “two story entry foyers” as “essential” or “desirable” as detailed in "What Home Buyers Really Want (2019 Edition)" published by the National Association of Home Builders.   While I applaud NAHB’s efforts to better understand the generation, this is a bit much, especially when a longitudinal comparison shows only a fifth of the boomer set as having the same preference.

Is this manifestation of the the false sense of intimacy conveyed by the cohort’s preferred methods of discovery (Zillow, HGTV...), combined with their relatively late start into the realities of home ownership?  One may deem this the “Mrs. Fletcher” conundrum, where the digital proxy, however authentic-seeming, is far from real.

Might the solution be to help home buyers better appreciate both the qualitative and quantitative value drivers that go into housing to understand the tradeoffs inherent in home ownership?

Will iBuyers love LA?

Leading iBuyers Opendoor, Redfin and Zillow are all entering Los Angeles, the second-largest housing market in the US.  Will their valuation algorithms be up to the challenges of this significantly more heterogenous and expensive real estate market?  Tune in...

Areas of highest millennial concentration seeing lower levels of home building

NAHB reports that the 25% of counties with highest millennial concentration saw construction growth rates for single-family and multifamily home building at generally lower rates "than the remaining 75% of counties. These statistics point to a growing geographic mismatch between younger households with expanding housing demand and where construction is expanding.