In late 2009, a Wall Street Journal reporter wrote that "questioning the sanctity of the 30-year fixed home loan is tantamount to proposing that the White House should be repainted pink."
With mortgage rates near historic lows, buyers may be tempted to lock in that long-term certainty. It's not difficult to see why the 30-year rate is so appealing: loans 30 years in length, with a fixed interest rate. Typically, the home-buying borrower will put roughly 20% down and then borrow the remaining 80% from a financial institution (the average down payment on all mortgages has been around 25% of late, a 20-year high).
But the popularity of the 30-year fixed mortgage could be a bad thing, Robert Shiller told me recently in an interview in front of a live audience at Motley Fool Headquarters.
Shiller, a Yale professor who just published his 10th book, Finance and the Good Society, is a leading expert on housing; in the video below, see why he thinks these types of mortgages represent "conventional thinking," a pet peeve of his. (Run time is 1:16; a transcript is below.)
Brian Richards: I read in an interview that you did that your biggest pet peeve was conventional thinking.
Robert Shiller: Right, that's a chapter in this book.
Richards: Could you give us an example in finance or investing, in a financial or a business context, where you see too much conventional thinking?
Shiller: Well, I'm thinking in terms of mortgages -- that most people will buy a house and borrow 90% of the money in a fixed-rate, 30-year mortgage, and that puts them in a leveraged position.
For some reason, that's conventional. And people have been trying to propose alternatives like shared-appreciation mortgages, or what I described in here [Finance and the Good Society] as a "continuous workout mortgage." That would be risk-managing. To me, the leveraged investments -- undiversified investments -- are dangerous, and we've seen what happened with the current financial crisis. And yet, nothing fundamental has changed.
So Dodd-Frank calls for a study of shared-appreciation mortgages, but we haven't seen it yet. Nothing, we're just doing the same; Fannie and Freddie have failed. They're now taken under the government and they're just doing the same thing. I think people are just very mistrustful.
For more insights from my talk with Robert Shiller, see:
- Where To for Home Prices? Robert Shiller Weighs In
- The Market Is Overvalued by Historical Standards, but You Can Still Expect "Pretty Good" Returns
- Robert Shiller on the Bubble in Bubble Predictions