Denmark Made Home Buying Easier. America Should Follow Its Lead.
Denmark Made Home Buying Easier. America Should Follow Its Lead.
In a cruel twist, millions of Americans are trapped in their homes by low mortgage rates. Denmark's housing market offers a tantalizing alternative.
I doubt it'd fix the housing crisis here, but it would certainly help. I'm not sure how many people would warm up to it, though. A large part of our problem is that there isn't any affordable housing. The fact the average house cost in 2023 was around $450,000 is insane, especially given the median income in the US was roughly $75,000 in 2022.
So yes, being able to buy back our mortgage's bonds at their market value may be a boon, but the fact that the Dane's require at least 20% down for their system to work would be a nonstarter for so many people. Roughly 65% of Americans are living paycheck to paycheck. A small minority of people are going to have the ~$80,000 to required to put down on a $450,000 house. Ultimately, turning housing into such a profitable investment option has led us to this situation, as having fewer houses means the existing houses are worth more and will only increase in value, making it a much more attractive investment than building new housing en masse.
19require at least 20% down for their system to work would be a nonstarter for so many people.
That's not really how it works, though. You actually only have a to put down 5 percent or more in Denmark. Much like the US.
The difference is that, in Denmark, the mortgage (the loan with the covered bond) can only finance 80 percent of the value, the rest can be financed by a regular bank loan. So 80 percent mortgage and 15 percent bank loan.
13The point of requiring 20% is to suppress demand, pushing prices down toward affordability.
4The down payment requirements were introduced in the 2010s, because too many people got their fingers burned on rate free loans. Prior to that it was possible to make a mortgage of 100% of the capital and no rate payment for 10 years, in which buyers only had to pay interest which was around 6% at the time or variable between 2-4% or so.
It obviously broke when the 10 years were up and people had to "suddenly" pay both rates and interest on way too large loans. The banks had expected people to refinance before that and were gladly passing out unrealistically large loans.
It was crazy beforehand. You could walk broke and unemployed into a bank and get approved for buying houses worth millions, because you didn't have to prove any kind of income except for covering the interest for the next month.
The down payment requirement forced the banks not to pass out these "free" loans to people without money. Not only should people be able to stomp up some cash, it also requires the bank to participate in the risk that they sell.
Now more currently, this up-conversion rage is something else. It can free up cash, right? Sure, but it makes the most sense if the customer has more expensive debts to be covered by that "free" liquidity. Like the bank loan? So that's why the banks have been pushing it well out of what is reasonable. Yes, there were money to be made for a small window in 2022, but by the time your bank advices you to do it, you can bet that it is well past the good deal. For customers, it only makes sense in the long run if you can close more expensive loans or desperately need liquidity for perhaps buying a more expensive house, and don't mind pushing the payments ahead into the future where you will "obviously" make soo much more money.
Personally I have converted my loan two times, but only downwards from 4% to 2.5% to 1%. I skipped the lowest offer of 0.5% because the savings didn't cover the costs of doing it. I will be happily "locked in" on my 1% mortgage until I sell this house. Refinancing might free up cash, but it doesn't balance in the long run. I'd basically be paying myself back for taking out that cash now, while the bank would take out their part right away.
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A much bigger impact would have tearing down all the stupid parking spaces and changing zoning regulations to build higher density housing. The urban sprawl is unsustainable long term.
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Housing was out of reach for many Americans before interest rates went up. I don't think allowing an escape to mortgage rate lock-in is a bad idea, but state and municipal funding and financing and zoning reform would make more of a difference in the housing market.
11Or probably just do both.
5Yes please!
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Thanks
3Oh actually, it's not working. Idk
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This sounds good, but I don't fully grasp the covered loan aspect. So the bank is required to sell a matching bond on the open market. What's the difference between the rate on mortgage and the rate on the on bond? Is it also matched or just the principal? Does that make the interest a wash for the bank, so that their primary motivator is fee collection?
5Here's an in-depth comparison between the US and Danish mortgage models. It's a PDF from the NY Fed:
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We don't have enough homes we are millions of homes short. There is no solution until building goes into over drive.
5The number of empty houses in North America is absurd. Zoning and regulatory structure are as much an issue as construction.
5You're right but that's not the problem attempting to be addressed with Denmark's system.
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-8Maybe, but that doesn't really have anything to do with what the article is covering.
14spoiler
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The nice thing about owning a home is that you actually build up your saving. If you at some point get in hot waters you can sell your home to get some backup cash.
8In a healthy housing market, there's enough competition that renting is much cheaper than buying. Indeed, I remember it being that way when I was a kid. Over the course of my life, landlording went from something that retired people did for a very small additional income stream to a get rich quick scam.
14The nice thing about owning a home is that you actually build up your saving.
Thats true in some countries, but not so in all countries. Ownership in some places means simply paying on the interest without any assumption about paying on the principal. A person could still make money if their property appreciates because of market conditions where they could cash out when they sell it, but there's no guarantee on that.
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