Sep 4, 2023 122 comments

What to Do About These High Interest Rates

Whoa, have you seen what just happened to interest rates!?

Suddenly, after at least fourteen years of our financial world being mostly the same, somebody flipped over the table and now things are quite different.

Interest rates, which have been gliding along at close to zero since before the Dawn of Mustachianism in 2011, have suddenly shot back up to 20-year highs.

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Which brings up a few questions about whether we need to worry, or do anything about this new development.

Is the stock market (index funds, of course) still the right place for my money?
What if I want to buy a house?
What about my current house – should I hang onto it forever because of the solid-gold 3% mortgage I have locked in for the next 30 years?
Will interest rates keep going up?
And will they ever go back down?

These questions are on everybody’s mind these days, and I’ve been ruminating on them myself. But while I’ve seen a lot of play-by-play stories about each little interest rate increase in the financial newspapers, none of them seem to get into the important part, which is,

“Yeah, interest rates are way up, but what should I do about it?”

So let’s talk about strategy.

Why Is This Happening, and What Got Us Here?

Interest rates are like a giant gas pedal that revs the engine of our economy, with the polished black dress shoe of Federal Reserve Chairman Jerome Powell pressed upon it.

For most of the past two decades, Jerome’s team and their predecessors have kept the pedal to the metal, firing a highly combustible stream of easy money into the system in the form of near-zero rates. This made mortgages more affordable, so everyone stretched to buy houses, which drove demand for existing homes and new construction alike.

It also had a similar effect on business investment: borrowed money and venture capital was cheap, so lots of entrepreneurs borrowed lots of money and started new companies. These companies then rented offices and built factories and hired employees – who circled back to buy more houses, cars, fridges, iPhones, and all the other luxurious amenities of modern life.

This was a great party and it led to lots of good things, because we had two decades of prosperity, growth, raising our children, inventing new things and all the other good stuff that happens in a successful rich country economy.

Until it went too far and we ended up with too much money chasing too few goods – especially houses. That led to a trend of unacceptably fast Inflation, which we already covered in a recent article.

So eventually, Jay-P noticed this and eased his foot back off of the Easy Money Gas Pedal. And of course when interest rates get jacked up, almost everything else in the economy slows down.

And that’s what is happening right now: mortgages are suddenly way more expensive, so people are putting off their plans to buy houses. Companies find that borrowing money is costly, so they are scaling back their plans to build new factories, and cutting back on their hiring. Facebook laid off 10,000 people and Amazon shed 27,000.

We even had a miniature banking crisis where some significant mid-sized banks folded and gave the financial world fears that a much bigger set of dominoes would fall.

All of these things sound kinda bad, and if you make the mistake of checking the news, you’ll see there is a big dumb battle raging as usual on every media outlet. Leftists, Right-wingers, and anarchists all have a different take on it:

It’s the President’s fault for printing all that money and running up the debt! We should have Fiscal Discipline!
No, it’s the opposite! The Fed is ruining the economy with all these rate rises, we need to drop them back down because our poor middle class is suffering!
What are you two sheeple talking about? The whole system is a bunch of corrupt cronies and we shouldn’t even have a central bank. All hail the true world currency of Bitcoin!!!

The one thing all sides seem to agree on is that we are “experiencing hard economic times” and that “the country is headed in the wrong way”.

Which, ironically, is completely wrong as well – our unemployment rate has dropped to 50-year lows and the economy is at the absolute best it has ever been, a surprise to even the most grounded economists.

The reality? We’re just putting the lid back onto the ice cream carton until the economy can digest all the sugar it just wolfed down. This is normal, it happens every decade or two and it’s no big deal.

Okay, but should I take my money out of the stock market because it’s going to crash?

This answer never changes, so you’ll see it every time we talk about stock investing: Holy Shit NO!!!

The stock market always goes up in the long run, although with plenty of unpredictable bumps along the way. Since you can’t predict those bumps until after they happen, there is no point in trying to dance in and out of it.

But since we do have the benefit of hindsight, there are a few things that have changed slightly: From its peak at the beginning of 2022 until right now (August 2023 as I write this), the overall US market is down about 10%. Or to view it another way, it is roughly flat since June 2021, so we’ve seen two years with no gains aside from total dividends of about 3%.

Since the future is always the same, unknowable thing, this means I am about 10% more excited about buying my monthly slice of index funds today than I was at those peak prices.

Should I start putting money into savings accounts instead because they are paying 4.5%?

This is a slightly trickier question, because in theory we should invest in a logical, unbiased way into the thing with the highest expected return over time.

When interest rates were under 1%, this was an easy decision: stocks will always return far more than 1% over time – consider the fact that the annual dividend payments alone are 1.5%!

But there has to be some interest rate at which you’d be willing to stop buying stocks and prefer to just stash it into the stable, rewarding environment of a money market fund or long-term bonds or something else similar. Right now, if a reputable bank offered me, say, 12% I would probably just start loading up.

But remember that the stock market is also currently running a 10% off sale. When the market eventually reawakens and starts setting new highs (which it will someday), any shares I buy right now will be worth 10% more. And then will continue going up from there. Which quickly becomes an even bigger number than 12%.

In other words, the cheaper the stocks get, the more excited we should be about buying them rather than chasing high interest rates.

As you can see, there is no easy answer here, but I have taken a middle ground:

I’m holding onto all the stocks I already own, of course
BUT since I currently have an outstanding margin loan balance for a house I helped to buy with several friends (yes this is #3 in the last few years!), I am paying over 6% on that balance. So I am directing all new income towards paying down that balance for now, just for peace of mind and because 6% is a reasonable guaranteed return.
Technically, I know I would probably make a bit more if I let the balance just stay outstanding, kept putting more money into index funds, and paid the interest forever, but this feels like a nice compromise to me

What if I want to Buy a House?

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For most of us, the biggest thing that interest rates affect is our decisions around buying and selling houses. Financing a home with a mortgage is suddenly way more expensive, any potential rental house investments are suddenly far less profitable, and keeping our old house with a locked-in 3% mortgage is suddenly far more tempting.

Consider these shocking changes just over the past two years as typical rates have gone from about 3% to 7.5%.

Assuming a buyer comes up with the average 10% down payment:

The monthly mortgage payment on a $400k house has gone from about $1500 at the beginning of 2022 last year to roughly $2500 today. Even scarier, the interest portion of that monthly bill has more than doubled, from $900 to $2250!

For a home buyer with a monthly mortgage budget of $2000, their old maximum house price was about $500,000. With today’s interest rates however, that figure has dropped to about $325,000

Similarly, as a landlord in 2022 you might have been willing to pay $500k for a duplex which brought in $4000 per month of gross rent. Today, you’d need to get that same property for $325,000 to have a similar net cash flow (or try to rent each unit for a $500 more per month) because the interest cost is so much higher.

And finally, if you’re already living in a $400k house with a 3% mortgage locked in, you are effectively being subsidized to the tune of $1000 per month by that good fortune. In other words, you now have a $12,000 per year disincentive to ever sell that house if you’ll need to borrow money to buy a new one. And you have a potential goldmine rental property, because your carrying costs remain low while rents keep going up.

This all sounds kind of bleak, but unfortunately it’s the way things are supposed to work – the tough medicine of higher interest rates is supposed to make the following things happen:

House buyers will end up placing lower bids which fit within their budgets.

Landlords will have to be more discerning about which properties to buy up as rentals, lowering their own bids as well.

Meanwhile, the current still-sky-high prices of housing should continue to entice more builders to create new homes and redevelop and upgrade old buildings and underused land, because high prices mean good profits. Then they’ll have to compete for a thinner supply of home buyers.

The net effect of all this is that prices should stop going up, and ideally fall back down in many areas.

When Will House Prices Go Back Down?

This is a tricky one because the real “value” of a house depends entirely on supply and demand. The right price is whatever somebody is willing to pay for it. However, there are a few fundamentals which influence this price over the long run because they determine the supply of housing.

The actual cost of building a house (materials plus labor), which tends to just stay pretty flat – it might not even keep up with inflation.
The value of the underlying land, which should also follow inflation on average, although with hot and cold spots depending on which cities are popular at the time.
The amount of bullshit which residents and their city councils impose upon house builders, preventing them from producing the new housing that people want to buy.

NIMBYS in my own area, damaging the housing market.

The first item (construction cost) is pretty interesting because it is subject to the magic of technological progress. Just as TVs and computers get cheaper over time, house components get cheaper too as things like computerized manufacturing and global trade make us more efficient.

I remember paying $600 for a fancy-at-the-time undermount sink and $400 for a faucet for my first kitchen remodel in the year 2001. Today, you can get a nicer sink on Amazon for about $250 and the faucet is a flat hundred. Similarly, nailguns and cordless tools and easy-to-install PEX plumbing make the process of building faster and easier than ever.

On the other hand, the last item (bullshit restrictions) has been very inflationary in recent times. I’ve noticed that every year another layer of red tape and complicated codes and onerous zoning and approval processes gets layered into the local book of rules, and as a result I just gave up on building new houses because it wasn’t worth the hassle. Other builders with more patience will continue to plow through the murk, but they will have less competition, fewer permits will be granted, and thus the shortage of housing will continue to grow, which raises prices on average.

Thankfully, every city is different and some have chosen to make it easier to build new houses rather than more difficult. Even better, places like Tempe Arizona are allowing good housing to be built around people rather than cars, which is even more affordable to construct.

But overall, since overall US house prices adjusted for inflation are just about at an all-time high, I think there’s a chance that they might ease back down another 25% (to 2020 levels). But who knows: my guess could prove totally wrong, or the “fall” could just come in the form of flat prices for a decade that don’t keep up with inflation, meaning that they just feel 25% cheaper relative to our higher future salaries.

Inflation-adjusted house prices over the last 35 years.

When Will Interest Rates Go Back Down?

The funny part about our current “high” interest rates is that they are not actually high at all. They’re right around average.So they might not go down at all for a long time.

Remember that graph at the beginning of this article? I deliberately cropped it to show only the years since 2009 – the long recent period of low interest rates. But if you zoom out to cover the last seventy years instead, you can see that we’re still in a very normal range.

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But a better answer is this one: Interest rates will go down whenever Jerome Powell or one of his successors determines that our economy is slowing down too much and needs another hit from the gas pedal. In other words, whenever we start to slip into a genuine recession.

In order to do that however, we need to see low inflation, growing unemployment, and other signs of an economy that is finally cooling down. And right now, those things keep not showing up in the weekly economic data.

You can get one reasonable prediction of the future of interest rates by looking at something called the US Treasury Yield Curve. It typically looks like this:

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What the graph is telling you is that as a lender you get a bigger reward in exchange for locking up your money for a longer time period. And way back in 2018, the people who make these loans expected that interest rates would average about 3.0 percent over the next 30 years.

Today, we have a very strange opposite yield curve:

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If you want to lend money for a year or less, you’ll be rewarded with a juicy 5.4 percent interest rate. But for two years, the rate drops to 4.92%. And then ten-year bond pays only 4.05 percent.

This situation is weird, and it’s called an inverted yield curve. And what it means is that the buyers of bonds currently believe that interest rates will almost certainly drop in the future – starting a little over a year from now.

And if you recall our earlier discussion about why interest rates drop, this means that investors are forecasting an economic slowdown in the fairly near future. And their intuition in this department has been pretty good: an inverted yield curve like this has only happened 11 times in the past 75 years, and in ten of those cases it accurately predicted a recession.

So the short answer is: nobody really knows, but just for fun I’ll make a guess. Then if I’m wrong in public, you can come back and make fun of this in the comments.

I think we’ll probably see interest rates start to drop within 18-24 months, and the event may be accompanied by some sort of recession as well.

The Ultimate Interest Rate Strategy Hack

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I like to read and write about all this stuff because I’m still a finance nerd at heart. But when it comes down to it, interest rates don’t really affect long-retired people like many of us MMM readers, because we are mostly done with borrowing. I like the simplicity of owning just one house and one car, mortgage-free.

With the current overheated housing market here in Colorado, I’m not tempted to even look at other properties, but someday that may change. And the great thing about having actual savings rather than just a high income that lets you qualify for a loan, is that you can be ready to pounce on a good deal on short notice.

Maybe the entire housing market will go on sale as we saw in the early 2010s, or perhaps just one perfect property in the mountains will come up at the right time. The point is that when you have enough cash to buy the thing you want, the interest rates that other people are charging don’t matter. It’s a nice position of strength instead of stress. And you can still decide to take out a mortgage if you do find the rates are worthwhile for your own goals.

So to tie a bow on this whole lesson: keep your lifestyle lean and happy and don’t lose too much sweat over today’s interest rates or house prices. They will probably both come down over time, but those things aren’t in your control. Much more important are your own choices about earning, saving, healthy living and where you choose to live.

With these big sails of your life properly in place and pulling you ahead, the smaller issues of interest rates and whatever else they write about in the financial news will gradually shrink down to become just ripples on the surface of the lake.

In the comments: what have you been thinking about interest rates recently? Have they changed your decisions, increased, or perhaps even decreased your stress levels around money and housing?

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* Photo credit: Mr. Money Mustache, and Rustoleum Ultra Cover semi gloss black spraypaint. I originally polled some local friends to see if anyone owned dress shoes and a suit so I could get this picture, with no luck. So I painted up my old semi-dressy shoes and found some clean-ish black socks and pants and vacuumed out my car a bit before taking this picture. I’m kinda proud of the results and it saved me from hiring Jerome Powell himself for the shoot.

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Ron September 4, 2023, 3:56 pm

“So the short answer is: nobody really knows, but we’ll probably see interest rates start to drop within 18-24 months, and the event may be accompanied by some sort of recession as well.”

OH NO! You made the fatal mistake of predicting shorter term financial stuff. -2 points sir :)

Kidding aside, one thing to point out about interest rates is that for years people had been saying “Rates -have- to go up sooner or later.” Which technically is true. But kinda misleading, because those rates stayed low for a looooong time. It goes to show that we’re so sure where the market, or interest rates, or whatever, are heading in the shorter term that we forget that we really have no idea.

Reply
- Mr. Money Mustache September 4, 2023, 4:04 pm
  
  Good points Ron – I’ll change that part of the article to emphasize that it’s just my guess and it will be fun to see how right or wrong it is.
  
  Also to reinforce your point: interest rates were able to surprise everyone and stay low for so long because we kept having such low inflation. And the things that caused that (the deflationary effects of technology and trade) are only accelerating at this point.
  
  On top of that, we are just in the process of flipping from a world powered by an expensive, labor intensive energy source (oil) to a much cheaper and more consistent one (solar), which will raise productivity and cut down the cost of everything even more. Which means more low inflation and probably low rates for another generation.
  
  I wouldn’t bet much on my financial prediction, but I *DO* feel much more confident about the energy prediction.
  
  Reply
  - The young investor September 5, 2023, 1:46 am
    
    Great article and useful reminder to keep paying attention only to what is under our control (spending, saving, lifestyle, etc). However, I would be wary of predicting a drop in inflation anytime soon – couple of points:
    
    – trade is deflationary but we are hastily moving toward less globalization and international trade, not more. Trade is increasingly happening only with like-minded partners (e.g. friend-shoring, de-coupling, etc).
    
    – the energy transition is extremely expensive to consumers and will require much more than solar panels. Oil is cheap, renewables (and their embedded minerals) are not. Also, you can charge your Tesla with PV, but renewables can’t be used (to this day) to produce the basic pillars on which our society relies: steel, cement, ammonia and plastic.
    
    I’d recommend reading ‘How the World Really Works’ by scientist Vaclav Smil for a more comprehensive overview of how we produce and use energy and resources.
    
    Reply
    - Andreas September 6, 2023, 12:44 am
      
      Regarding less globalization this could also be a good thing, depending of course how things play out. But more production in the west, due to increased and cheaper (?) production could make everything even cheaper and better. Also money might stay more where “home” is. More work and opportunities here, for some sectors/industries it is now possible to manufacture here, close to market instead of over there.
      Its happening where I live, and it is not due to political reasons or anything similar, it is due to market demands and profits. Automation and tech makes it cheaper, and possible. While also creating tons of more qualified work. iI the long run this could help us out since paying dictators to produce our stuff has its risks…
      
      Regarding steel:
      Fossil free steel in tree years, sure a lot of PR and probably resonable to be hesitant, but still seems like progress.
      
      https://www.ssab.com/en-us/fossil-free-steel
      
      Reply
    - acprogrammer September 29, 2023, 5:46 pm
      
      Not sure you’ve kept up with energy developments. Renewables have dropped like a stone in the last few years. It’s now cheaper to put in utility scale wind and solar than continue to operate coal. Still trying to figure out solutions for dealing with the variability of renewables, so we’re not quite to a point where we can go 100% renewable yet, but I see alot of exciting developments (flow batteries, lithium-sulfur, sodium ion, and more) that mean we’ll probably get there soon.
      
      Yeah, we can make steel with renewables. And remember, alot of steel is part of a circular economy, so you just have to melt the old – something easy to do with renewables. Same with ammonia (the Haber process really just needs N2 and H2 – N2 is easy, H2 is most economical by steam reforming of hydrocarbons, but might not be too bad if excess renewable energy can be used for electrolysis). Cement is a little trickier because the process of turning limestone into Portland Cement inherently gives off CO2 (some of which is reabsorbed when the concrete sets). But the kilns and such can absolutely be powered with renewables.
      
      Plastic depends quite a bit on which type of plastic. None of our plastic is realistically made using much electricity – it’s more what feedstock you use. And yeah, alot of plastics are oil based and might very well use oil for some time (you CAN synthesize hydrocarbons using renewable energy, but not really economically viable right now). But stuff like PLA is getting alot more use and that’s made from sugar and dextrose from a number of plants.
      
      Reply
Republic DC-9 September 4, 2023, 4:18 pm

Great article, MMM!

My wife and I have been collecting a variety of 5+% CDs-now that the house is paid off and we’re becoming more Mustachian and saving 60%+ of our income.

But you make good points about buying stocks on sale.

One thing I’m doing is selling off all of my hundreds of dust catching, very pricey die cast model planes (all but my favorites) to fund more investment and push us towards FIRE much sooner. Just dealing with he clutter of our stupid days of overspending makes it easy not to buy more stuff and invest instead. We’ve done well with about $1.4M of net worth, but could have done better!

Reply
Keenan September 4, 2023, 4:45 pm

Good insight MMM! This is particularly applicable to my wife and I as we are saving up for our first time home purchase in California. We just wrapped up a year long road trip while working remote and were able to travel across the whole US. We loved Boulder and Longmont! It was eye opening to see how high real estate prices were all over the place… Denver, Austin, Raleigh and other places all had homes similar in price to San Diego.

For now we’re continuing to build up a downpayment but are also considering just building a home directly since we have lots of ideas and notes from living in many different homes across the US. Perhaps you could dive into more thoughts on building a home? Cost effective ways to build/add value to a home similar to your EV charger install video, Kitchen renovation article and painting video would be great!

Reply
Andy September 4, 2023, 5:24 pm

Great post. I work in the Real Estate industry and I concur with many of the points you said here. Sellers don’t want to sell cause they are sitting on a fixed 3.5% and buyers don’t want to buy at 8% interest. The market is frozen and something should give in.

I think the market will be frozen for the next 6 months-ish and then the unemployment will rise, people can’t make their mortgage, sellers will give in and improve liquidity (+ new homes) JP will be forced to cut rates.

We will probably see a good bottom in Feb- April 2024 for the RE space.

Reply
- Brian September 5, 2023, 10:54 am
  
  Banking industry worker here. Andy, sorry to rain on your parade, but Redfin came out with an article in June breaking down the outstanding mortgage market by current loan rates. 91.8% are below 6%, 82.4% are below 5%, 62% are below 4% and 23.5% are below 3%. There is a significant cost to +60% of the market place to move – as referenced by MMM. Even if rates come down from the current +7% rate to what ~6%. This would benefit a small portion of the overall existing market. There is going to need to be an economic/life motivator to get people to move. I think you are going to see years of record low listings. The government is enjoying the benefit from keeping rates high, which is new home construction vs existing home listings, every new house built creates the equivalent of 2.9 jobs. – per NAHB. There is a long road ahead for the RE industry.
  
  Reply
  - Chris September 11, 2023, 2:42 pm
    
    Hi Brian, there is a bigger picture of home creation that is causing the government to keep rates higher for longer and that is inflation. The government and private sector ideally want rates low, IF inflation stays low. Higher rates cause slowdowns in hiring and growth which is less tax revenue for Uncle Sam. We also have higher interest costs with a national debt over $30 trillion now. Both of those items are a bit more important to the government than new home construction jobs.
    
    Reply
- Hige Ojisan September 5, 2023, 9:57 pm
  
  Some more real estate knowledge, courtesy of BiggerPockets (I particularly like their On the Market podcast lately for data).
  
  First, everyone seems convinced that prices will fall, but there are some trends that make a big fall in prices unlikely:
  1) There is a huge shortage of housing stock, to the point that it will take them 10+ years to build enough housing to fill existing demand. This is partially because homebuilders stopped building for a few years following the GFC and we’re seeing the delayed effects.
  2) The Millennial generation, which is the biggest generation since the Boomers, is just now reaching their peak household formation years. This means more demand. And Boomers are living longer as well so not turning over as fast as previous generations.
  
  Interestingly, despite the high interest rates and stubbornly high prices, affordability is still up in the last 6 months as wage growth is outpacing price/rate inflation. I wouldn’t mind a slight correction or even just stagnant prices for a few years as affordability is at close to all-time lows. Let wages catch up to prices more.
  
  And for those looking to purchase soon, see if you can work a subject-to deal and talk the seller into letting you assume their loan given all these houses sitting on low interest loans. This can be tricky in some cases though as it can limit the seller if they’re trying to get a loan themselves for another house. Another thing I’ve heard is that homebuilders are giving great deals right now on their new stock, which could make new homes more affordable than existing homes. Their normal incentives of 3%ish are now up around 6-8% in some markets with rate buydowns and cash at closing.
  
  Reply
  - Tony Clifton September 18, 2023, 5:00 pm
    
    “letting you assume their loan” I keep hearing this idea – from friends and family in Real Estate, all are pushing this idea, even lobbying for regulatory changes to allow home owners to take their existing mortgages with them if they sell / buy another property.
    
    This is a one sided argument – if you invert – the holder of the MBS is currently getting paid an avg of 3.6% interest while they could be getting 5.5% holding no risk treasury debt.
    
    What counter party in their right mind is going to allow a mortgage to be renegotiated if the rate is not going to be north of the current risk free short term treasury interest rate.
    
    Only one person – and that MBS holder is the US government – the buyer of last resort that has purchasing most all of our mortgages since the public mortgage market collapsed in 2008. It never got fixed guys – and its all happening again in slow motion just with all the pieces moved around. Instead of credit risks now we have duration risks and a $1.5 Trillion Dollar US deficit in 2023.
    
    The US government is desperately trying to unwind this massive Asset-Liability-Duration-Mismatch left over from the GFC and Covid emergency easing to normalize the yield curve. For interest rates to go lower – there is going to have to be pain. The divided congress is just not going to allow further subsidized loans to the residential market. Housing is frozen for many years or we get a severe pull back in prices… there is just nobody to buy the MBS debt under the 5.5% short term treasury rate except the US government.
    
    The party had to end… no more $250K GIF’s and $2M 1950 2-bedroom fixer uppers.
    
    https://fred.stlouisfed.org/series/WSHOMCB
    
    Reply
Randy September 4, 2023, 5:31 pm

I don’t understand why the bank has to offer you a 12% guaranteed return to pull funds from the stock market, whereas you are happy with a 6% guaranteed return paying back your loan (and hence not putting it in the stock market). Why such a big difference between the two?

Reply
- Mr. Money Mustache September 4, 2023, 7:51 pm
  
  Well the first reason is that I’m not totally rational :-)
  
  So like most of us, my decisions around money are made around what “feels” good, especially now that extra money doesn’t serve much purpose. It feels good pay off a margin loan that is at over 6%, and feels less good to see big interest bills coming in every month.
  
  But if we’re talking about actually *selling* shares to move to another form of investment, the bar is much higher because you would owe full income tax (probably long-term capital gains tax) on the withdrawal.
  
  Reply
  - Brenton September 22, 2023, 2:00 pm
    
    Another reason is that 6% returns on a bank account are taxed as income while paying off 6% debt is after-tax. For a high earner, it’s closer to 9%.
    
    Also, it has other advantages like freeing up additional cash flow because principal is also required when servicing that debt.
    
    Reply
Colin September 4, 2023, 5:44 pm

Earlier this year my wife and I decided to sell the house we’ve lived in for 10 years in order to move into a condo in a more fun area of town. Our interest rate went up 3%, but the other choice is to just sit somewhere we aren’t happy until some hypothetical future market move. I consider those years sub-3% to be savings that let us weather these interest rates for a while.

The tanking inventory worked out in our favor too, our house sold in just days for above asking because it was one of the few good ones on the market.

Reply
- Mr. Money Mustache September 4, 2023, 7:53 pm
  
  I like this story! That’s one of the best uses of money – using it to get yourself a place to live that you actually enjoy, in a great location. Totally worth spending more for if you can afford it.
  
  Reply
Randy September 4, 2023, 6:06 pm

Do you have any financing suggestions for super frugal Mustachians that are well off on paper to purchase a home out right, but not well off enough to cover the purchase via a ‘safe’ margin loan, nor qualify based on an asset depletion loan?

Besides having enough paper wealth to purchase the house, we could also afford the loan because of our ultra low spending lifestyle, but banks will only consider ~1/3 of one’s income for housing. So the only option appears to be selling equities to cover most of the purchase price. Not ideal since we still have our w2 jobs and would be paying lots of taxes on the gains and then have all that money tied up in a house.

If we wait until we are retired, the taxes would be less, but then we’d have to cover pretty much the entire purchase due to lack of w2 income required for the loan.

I wish there was a bank for Mustachians.

Reply
- Mr. Money Mustache September 4, 2023, 8:01 pm
  
  I’ve run into this exact same problem at various times during retirement and you’re right – the main reason is that banks are too crusty and conservative (and people who are actually GOOD with money are so rare that they have never had a reason to build financial products that serve us!)
  
  If you have other close friends with significant savings, you may be able to create your own bank as we have done here in my own social group – house and business financing deals fly around left and right here and it’s a joy to thumb our noses at the banks.
  
  Another option is sometimes to buy a piece of land outright and then leverage that into the building of a house using a creative mix of ongoing income, maybe a margin loan, maybe a line of credit on the land and maybe selling a few shares if you need to do so.
  
  In today’s real estate market, building a new house is suddenly more worthwhile because we have the opposite situation of the 2011 era: back then houses were so cheap that they were often priced lower than the construction cost even assuming a land price of zero. Today, houses are sometimes priced at DOUBLE the sum of land plus construction cost. So it makes me more excited about building them – if it weren’t for the clunky approval process in my area.
  
  Reply
  - Chris Jones September 5, 2023, 1:50 pm
    
    “house and business financing deals fly around left and right here and it’s a joy to thumb our noses at the banks.”
    
    This would be a great MMM article. I have done this once with a friend, but we had to make up documents from scratch. It would be helpful to see some cookie-cutter documents, along with an explanation of how you and your friends manage interest rates, payments, remaining friends while doing business, and reporting loan payment income for taxes.
    
    Reply
    - David Albrecht September 7, 2023, 1:07 pm
      
      I manage a bank-like holding company for my family (sub-$1m equity).
      
      Loans are actually pretty straightforward things, when you get down to it: simple agreements to pay money back on a schedule. Basically all you need is some way to do a recurring transfer, some basic accounting, and enough tax knowledge to property calculate and book interest. Plus awareness of what interest rates are for various types of loans.
      
      Going back to the 20s and 30s, it wasn’t at all uncommon for neighbors to lend each other money for mortgage loans or small businesses. I’ve found loan records for this going through the possessions of people who lived in this era, after they died.
      
      The key is limiting your dealings to people who know how to handle credit responsibly. Speaking as a landlord, you’d be out of your mind lending to the to the 50%? of people I see with sub-600 FICOs, 100k+ in student and auto debt, and 30k or less in documented income. That’s like handling a loaded gun to a toddler. On the other hand, I have no qualms borrowing 45k from 3 friends to upgrade an HVAC unit at a commercial building I manage.
      
      Reply
      - Alex September 30, 2023, 5:01 pm
        
        “Loans are actually pretty straightforward things, when you get down to it:”
        
        Do you use then a simple Promissory Note to facilitate the agreement, or what exact documents are you using.
        
        Thanks in advance.
        
        Reply
- mary w September 5, 2023, 12:42 pm
  
  https://www.gocurrycracker.com/getting-a-mortgage-without-a-job/
  
  This might help. I thought the article was more recen than this so ymmv.
  
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- Scott C September 7, 2023, 10:27 am
  
  W2 income is not required. I was retired when I applied for a loan and they offered us a loan based on our taxable, tax-deferred and tax-free holdings (we are not yet 59 1/2). It was a much higher number than I expected, although we could have paid cash for the house, so pretty low risk to the bank.
  
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  - Randy September 17, 2023, 3:23 am
    
    @Scott C
    Do you remember what the approx. ratio between offered loan amount vs. total assets was? And what company did you talk to?
    
    If this was an asset depletion loan, then in my experience lenders require an insane amount of assets (6x / 9x for 15 / 30 year mortgage, respectively), at which point one can safely take out a margin loan.
    
    Reply
Pauline September 5, 2023, 1:22 am

Very nice photo.

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Bryan September 5, 2023, 6:02 am

Three great books to read by Charles Wheelan; Naked Economics, Naked Money, Naked Statistics.

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Zack Harris September 5, 2023, 7:28 am

MMM,

I have a followup question regarding the “having enough savings to pounce on a good deal” side of things.

I know it makes the most mathematical sense to max out a 401k before stashing anything in a taxable account, but if I want to be prepared to pounce on an investment property when and if the time comes at some point within the next 3-5 years or so, might it be a good strategy to just back down to the employer match for the 401k and put the rest of my bi-weekly surplus in a taxable account?

For reference, I have a fairly average income (about 50k gross), but very low expenses. My only debt is my half of a $886 mortgage payment (P&I only). I live lean enough so that I COULD definitely max out the 401k, but it would leave me with little post-tax savings. Just wondering if there’s anything I’m not thinking of here aside from simply increasing my income over time. Thanks. 🙂

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freeDHBdom September 5, 2023, 9:14 am

Is 10% the usual “Mustachian” down payment? I’m nervous to tie up so much in a down payment and would rather have it in VTSAX but I’ve been told to fear private mortgage insurance as well and so one should hit 20%. What would a diet Mustachian do

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- Mr. Money Mustache September 5, 2023, 2:56 pm
  
  I’m usually in favor of at least 20%, because when you work out the effective interest rate increase that PMI is hitting you with, it usually works out to a very good return on that extra 10%.
  
  For example, imagine a 500k house, and you are debating between a 50k or 100k downpayment (10 or 20%). And let’s say the interest rate is down at 5%.
  
  If the PMI premium is a typical 0.8% of the loan value $450k, you’d be paying an extra $3600 per year in PMI premiums. Just for the privilege of not putting down the extra $50k.
  
  That’s 7% of the potential extra downpayment that gets eaten up every year!
  
  Or to put it another way, if you put in the second $50k, you are earning 5% in foregone loan interest PLUS 7% in saved PMI premiums. 12% in total, which is the best return around.
  
  Reply
  - Randy September 17, 2023, 3:28 am
    
    It’s a similar return when deciding between a 15 vs 30 year mortgage (the 15 year mortgage provides the extra risk free return). The return decreases the longer one keeps the mortgage, but for most people who move / re-finance within 7 years or so, it’s well worth it.
    
    Reply
  - Charlotte October 2, 2023, 3:50 pm
    
    My brother got a mortgage from Navy Federal Credit Union with no PMI. So those deals are out there. This is not a VA loan, just standard mortgage. I’m thinking other credit unions might offer the same.
    
    Reply
Jeff VA September 5, 2023, 9:51 am

This is why timing and luck is so important in life.

If I was in the market for a house today, the combination of high interest rate + high property prices would’ve been daunting. My P&I for example is locked at $1.6k per month. If I bought my house today, based on the higher cost and higher interest rate, the P&I would be $4.1k. Literally more than double. Yikes.

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- Sarah September 5, 2023, 5:47 pm
  
  Ugh, 100% … we sold and moved long-distance this year for family/life/job preferences (important stuff). We broke on the sale from a capital perspective, but selling our 2.25% mortgage was a HUGE loss … Even if we *could* buy here for the same $$ (unlikely, higher housing costs here even if downsizing), the cost difference would be what you describe. We’d pay > $3k/month in interest alone, compared to previously paying ~$2k/month and <$900 in interest. Currently renting, but do want to buy and settle down … It was the right choice for our lives, but if I think about the long-term wealth implications of having made the same move and buying into this market even 4-5 years ago, how much more salary will forever be consumed by having this life transition now …
  
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  - drew September 6, 2023, 11:14 am
    
    I did the exact same thing last year. Moved for a better job in a nice area with better schools for kiddos in a similar COL area, only to find the COL had gone up around us in both locations. We couldn’t manage renting out the old house after moving across the country so now we’re stuck paying double in rent for the same amount of house we owned previously.
    
    I’d love to have a small home in the same school district we’re in now just to get that monthly price down, but nothing is worth the price and choices are limited.
    
    We’re screwed into saving less and getting chewed up by the imposed recession. At this point we can’t afford to save like the mustachians we were before moving, and the stress is building up from not being able to do so.
    
    Reply
  - Jeff VA September 11, 2023, 7:09 am
    
    You’re right about the long-term wealth implication, but I’m sure luck and timing will eventually align in your favor again. Housing market is bound to drop as well as the interest rate. The good thing about people getting 7% mortgage today is that they will be able to refinance in the future.
    
    Reply
Harry Smith September 5, 2023, 10:09 am

I’m curious why Mr. Money is so confident the stock market is always going to go up. Not even vanguard is predicting more than 4% growth for the foreseeable future.

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- Erich September 6, 2023, 7:35 am
  
  MMM has written several articles on this. Basically his reasoning is that if you look at the long term gains of the stock market since the 1880s, the trend is up. In the short term is it up and down and unpredictable but over a long enough horizon, it goes up.
  
  Reply
- Ron September 6, 2023, 8:12 am
  
  I’ll let MMM give his own opinion, but pretty much every calm and reasonable voice out there agrees the market will, in the end, “always go up” due to a variety of pretty solid reasons.
  
  You pointed out Vanguard’s opinion. Were they predicting 4% down…or up?
  
  Up. Hooray! “Even Vanguard” is in agreement.
  
  Reply
- Artem September 19, 2023, 12:56 pm
  
  I’m confused by this confidence as well. Any economy since the history of time has ultimately gone to zero for one reason or another. The weight of a turkey is also up and to the right until a few days before Thanksgiving when it’s culled. There are underlying dynamics responsible for the SP500’s growth but if those dynamics change, its future will not look like its past. What if the dollar loses reserve currency status? What if inflation leads to a currency crisis? What if a decreasing population leads to a decrease in productivity that AI can’t overcome? America used to be the world’s largest creditor nation. America is currently the world’s largest debtor nation. Can our economy really thrive with a 1 trillion dollar trade deficit? I’m not saying a black swan event will wipe out the American economy any time soon. I just think the “up and to the right” narrative is void of context.
  
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  - Mr. Money Mustache September 20, 2023, 2:59 pm
    
    Right.. but the point is, our lifetimes are short and working under the assumption of a bright future is MUCH more productive than assuming collapse is imminent.
    
    Doomsday predictors have been continuously wrong, wrong, wrong for this first 247 years of the history of the United States – imagine how much time and money was wasted on worrying during that time? Someday they may be correct. But most likely we will all be dead (after living long, extremely wealthy and productive lives) by that point.
    
    https://www.mrmoneymustache.com/2014/03/03/why-we-are-not-really-all-doomed/
    
    Reply
    - Artem September 21, 2023, 11:17 am
      
      Wow thanks for sharing this! This article actually changed my perspective quite a bit. The fact that you wrote it eight years ago says it all. Also, this line is is very insightful:
      
      “Similarly, the financial system, another machine that greatly raises productivity, is just another human invention. Even in 2008 when things got hokey and a big house of cards collapsed, some humans just stacked up a few new cards in a haphazard way and we all agreed to continue using it, and thus we all remained happy and productive.”
      
      Reply
Mark T September 5, 2023, 10:09 am

If you’re confident that the rates will drop again in the next 2-5 years, I wonder if the cost of refinancing at that time is enough to calm the fears of buying at the current higher rates.

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Robert September 5, 2023, 11:37 am

Great article as always.

I think the most important takeaway from this is how behaviors should change with higher rates. Maybe that new car isn’t as enticing as an older car or bicycle at 9% rates. Maybe the discretionary income should go into a mortgage paydown or line of credit at 6%+ rates. Higher rates will have their intended impact, even if it takes longer with the amount of fixed rate debt secured leading up to 2022.

The building codes / changes are so unfortunate. We need as much housing as possible and there’s a perverse incentive to prevent more housing if a NIMBY owns a house currently.

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Aliarri September 5, 2023, 2:10 pm

Thank you for another great article! For someone who has absolutely no background in finance/good money management, you have really helped set my family up for financial success. I only wished I had listened to you when you said to be a little riskier when young. I’ve been making very safe money decisions, and have put off living the way my family has wanted to, which is to get out of the city we live in. Buying a house nearby would put us 1 million in debt, so we purchased a house with 20 acres in the Sierra Nevada foothills (under 500k). The interest rate really helped us see that it wasn’t worth it to stay here, that combined with overall prices. Yes we thought about the worth of a dollar, but more importantly the worth of a day is what drove us. For us, it was putting the value of having a regular life(suburbs), good income(200k a year), but not living the way we want to. Now we are debating selling our house in town, cutting ties completely, or renting it out. Owe 260 on each house, city house has about 500k equity in it. What would you do MMM?

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Greg September 5, 2023, 3:56 pm

It’s just a matter of time (think 2025) before rates drop again and the real estate market kicks back into gear. In the meantime I’m happy parking my money in treasury bonds. Two cents and a safe bet.

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Alex September 5, 2023, 4:34 pm

A good option at the moment for military people looking to purchase homes is a VA assumption loan. Essentially you “assume” the VA loan of another person instead of getting a new loan at today’s rates. The downside is that the purchase takes much longer, and since interest rates have been going down for decades, it hasn’t made sense to do an assumption loan for decades, so most people aren’t familiar with the process. We’re about 3 months into the process, and it’s looking like end-to-end it is going to take 5-6 months, but we’re assuming a 2.25% interest rate instead of today’s ~7%. You also can’t choose how much your down payment is. You have to have enough cash on hand to pay off whatever the difference is between the purchase price and what the seller has left on the mortgage.

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- James December 26, 2023, 8:48 pm
  
  5-6 months? That’s wild. I just put in an offer on a home where assumption was an option — I thought, hey, maybe…3 months? Tops?
  
  Reply
Ryan H September 5, 2023, 4:41 pm

Madfientist has a good article on this, so I would defer to his analysis. The summary is essentially that if you maximize pre-tax contributions, you will owe significantly less taxes and thus your total “take-home” (including the saving) is higher. Otherwise you’re paying taxes on money you wouldn’t have to, which can still reduce your take-home pay even if it means more money in the taxable account. I see what you’re getting at though.

If I were in your shoes, I’d put the money in a high-yield savings account if the timeline is 3-5 years. Less volatile and interest rates are very strong at the moment, which benefits regular saving more. Now you’d still end up paying taxes on the take-home and then taxes on the interest income, but it’s the better option imo if you’re looking at <5 years.

I'd also review your 401k options and see what you have. If your account is full of funds that have high expense ratios and/or fees then it's less enticing than just saving for the investment property in cash. Just my two cents–although I won't charge you interest ;)

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Mr. 1500 September 5, 2023, 6:02 pm

I was talking to someone recently who was lamenting the good ole’ days of 2.5% rates. He let me know that he’s waiting for them to come back before buying a house. But nothing comes for free. As you alluded to, the reason rates get super low is because something else that’s super shitty is going on. So you may get a great rate, but your stock portfolio is also down 35%. Nothing comes for free.

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Jake September 5, 2023, 6:07 pm

Wow thanks MMM this article has come at a great time! This year I sold my rental property, stacked my California roof with solar and purchased an EV. I put the remaining $200k in a 5 month CD at 4.5%. In November I can pull that money and reinvest. It looks like i’ll easily be able to role that into a 5% for a year. It gives me huge peace of mind to get that guaranteed return each month, but history shows it would be better to invest in the market! Convince me it’s worth the stress!

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ErmaGerd September 5, 2023, 6:25 pm

Love this post! And I agree, all the hysteria about high interest lending rates is simply that – hysteria. I’m old enough to have shopped for my first home in the mid 1980’s. I got a fantastic rate (at the time) or 9.125% – many of my peers were paying up to twice that.

Now, at other end of the spectrum, winding down for retirement presents different goals. Growth is important. Stability is important. But peace of mind is priceless. So we are focusing on paying off our fantastic 2.75% mortgage before we retire. We have about $800K invested in the stock market, another $130k invested in HY cash savings & I Bonds. Yes, we could just keep stuffing the yield and growth mattresses, but we both feel that having a paid off mortgage is a huge factor in the peace of mind column. Some things are not about dollars – but sense. As we’ve been living on a budget of 46% of our net take home income for the past 10 years, we managed to build up a retirement (from having essentially none) that will be enough, even if not luxurious by most people’s standards. That in and of itself is miraculous, considering where we started (a whole different post, that). Luckily, we’re also both the beans & rice and a good vacation doing some hiking kind of people – not the toes-buttered fancy resort kind of people. I think our retirement will be spent enjoyably, with simple pleasures and lots of hobbies.

That said, if I were 20 (or even 10) years younger – I’d be happily cherry picking stocks right now, and enjoy paying off my mortgage at a leisurely pace (15 years) at an interest rate not likely to be seen again for another decade.

MMM – I have been reading your blog & benefiting from your wisdom since you began, post our last financial crisis (2008/2009 when our financial advisor – since fired – pretty much sank right into the septic field). I will be forever grateful for your plain speaking information and stoic viewpoint – you gave me confidence to navigate some very choppy seas over the past 12 years.

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- Charlie September 5, 2023, 7:22 pm
  
  If I may make a suggestion, do NOT pay down your 2.75% mortgage.
  Instead, put the money in a high-yield savings account or other safe vehicle paying more than 2.75% interest and label it (mentally or otherwise) “mortgage payoff fund”. Then when the balance exceeds your mortgage balance, pay off the mortgage in one fell swoop. You will be mortgage free faster that way than if you pay down the mortgage directly/incrementally.
  
  Reply
  - Erma September 6, 2023, 4:01 pm
    
    Suggestions always welcomed! Actually, that is more or less the method I’ve been using for the past 4 years. Whenever the HY cash savings gets above, $100k, I throw the surplus at the mortgage. All along, I’ve prioritized maxing out the 401k (husband’s), my traditional IRA, and husband’s ROTH accounts, then pay off revolving debt ( I haven’t paid credit card interest in years), living expenses, etc., then stuff the rest in cash in HY savings or buy stock. I have a brokerage account outside of retirement accounts that I opened to teach myself about investing and that has grown quite a bit as well – but I still think of it as my hobby account (my “play money”). If I were single, I’d likely be cherry picking stocks right now, but being married means you have two people to consider, and my husband is uber conservative and has zero desire to learn anything about investing.Paying off the mortgage balanced with continued investing and saving is a compromise we can both live with – or at least until & unless the earned interest rates climb to 6%. That will be an entirely new conversation.
    
    The luckiest day of my recent life was finding this blog at one of the lowest points of my financial existence. The smartest thing I’ve done financially was firing our financial advisor and educating myself about investing. It’s been an interesting, empowering, and profitable ride – and it all started right here.
    
    Cheers!
    
    Reply
  - Zak September 7, 2023, 8:35 am
    
    I’m going back and forth on this logic daily…pay the mortgage asap or sock in high yield savings then pay with the lump sum down line. Forgive my probably flawed thinking ..but even if I’m getting close to 5% in a high yield option, well over my 2.85% mortgage….doesn’t the front end loaded nature of interest payments for my mortgage factor in significantly here? Or at least should we be discussing what year in the mortgage we’re in (3 for me). In other words by the time I get that mortgage payoff fund fully loaded via HY account, will I really have made more in interest from the HY vehicle considering, again, how front end loaded the interest payments are for mortgages? Would LOVE someone here…maybe MMM himself to weigh in on this part of the equation or point me in the right direction if already been discussed!
    
    Reply
    - Zack September 19, 2023, 5:36 pm
      
      Zak,
      
      My mortgage is 2.5% – P&I is $886/mo. Last year, we had about 28 years left and the interest was slightly higher than the principal payment each month – about $450/mo. or so in interest. Did a lump sum payment and cut off about 15 years of payments – now almost all my payment goes to the principal. The interest each month is now only about $230/mo.
      
      In this sense, the savings in interest each month is about equal to what I’d be earning if I’d kept the lump sum in a money market. I’ve also got peace of mind because A. if I didn’t make another extra payment, I’ll still have a paid-for house in about 13 years, and B. since the money is already spent on the mortgage, it removes the temptation to find something else to use it on.
      
      So the short answer to your comment is: yes, the front-loaded nature of the mortgage does factor into the equation. From an interest savings perspective, it’s definitely more profitable to pay the mortgage down during the first half of the amortization versus the last half.
      
      Reply
    - Charlie September 19, 2023, 10:21 pm
      
      As I understand it, the front-loaded nature of interest on a mortgage is just a reflection (the mirror image, maybe) of compound interest. So an extra principal payment in year 1 of a 30 year fixed-rate mortgage has a greater impact than one in year 25 because it has longer to compound, not because it gives a greater rate of return.
      
      If you make an extra payment of $100 this year, next year your balance will be lower by $102.85. And in 27 years your balance will be lower by $100*1.0285^27=$213.56.
      
      But if instead you put $100 in your high-yield savings account, next year you will have $105. So you really will approach the payoff amount faster that way (as long as the interest rate you’re earning remains higher).
      
      Reply
      - jdm September 20, 2023, 10:48 pm
        
        You understand it correctly! You don’t pay more or less interest as a percentage of your loan by paying it off early or by paying it for 30 years – when you make extra payments early, you simply borrowed the total amount of money for less time. Naturally you pay less aggregate interest if you pay the loan off early, because you borrowed the total sum for less time. If your mortgage is 5%, for example, the total interest you pay as a percentage of what you borrowed will be 5% regardless of whether you pay off the loan in year 1 or year 30. Amortized payments confuse people into thinking that they’re paying more interest in the beginning than the end – no, you’re paying the percentage of whatever is outstanding. The amortization just allows one to have the same payment over the life of the loan, rather than a huge payment now and a itty bitty payment later. So it appears that you are paying more in interest, but it’s just that the interest that is owed is a greater percentage of the payment amount in the beginning because you owe more money.
        
        In any case, you are totally correct that in a static situation paying yourself $100 into a 5% bank account instead of paying $100 extra to a 2.75% mortgage will earn you the delta (5-2.75 =2.25%) real annual return, compounded. Of course there’s no guarantee the savings return remains at 5%, whereas the interest rate on the fixed mortgage is guaranteed to be 2.75%.
        
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- Kyle September 7, 2023, 6:38 am
  
  Just curious, what the logic is behind paying down a 2.75% mortgage when you can take the funds instead and place them in t-bills or cds and get 5-5.5% return? If a return greater than 2.75% was not an option I would understand. Paying off a mortgage is a great feeling but when interest returns are this high there are better options.
  
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Hige Ojisan September 5, 2023, 10:17 pm

My thoughts recently? With the highest interest rates in my investing career, when does it make sense to look into bonds? I know the VTSAX and Chill vibes are strong around here, but I remember reading that a 10% bond allotment has historically outperformed a 100% stock portfolio with less volatility. (I think that was from The Intelligent Investor)

Any bond buyers out here? I know i-bonds were big the last few years with inflation so high, and before that it was zero coupon bonds. What’s the play now? Almost 5% at 2 years or 4.4% at 5 years sounds way better than the numbers I’ve heard the past 10 years.

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- jdm September 20, 2023, 10:51 pm
  
  I bought I-bonds at the beginning of last year when the rates were kicking ass. I’ll probably redeem them at the first of the year and move those funds into a fixed longer-term product. 2 year T bonds just auctioned at over 5% recently. If we get one more rate hike they’ll probably be 5 1/2% by the beginning of the year, and since my view is the Fed is going to be forced to drop rates by the frozen housing market and the massive federal debt, that’s going to be a pretty attractive fixed vehicle. Or a similar 5.5+ % CD with a 2 year 0r more maturity as well.
  
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- Wade B September 22, 2023, 8:39 am
  
  The Vanguard Fed Money Market has a 7 day SEC Yield of 5.28%. No commitment of time.
  
  That pairs well with Total US or S&P 500 index. The Fed is saying rates until 2026, so that gives a nice window.
  
  Reply
Sergio September 6, 2023, 1:42 am

I’m surprised about your strong views on construction permitting. There are many valid reasons why developments must be limited. Just come to California so you can see how overbuilding leads to crowding, the removal of green spaces, and more traffic. This “lack of housing” needs to be looked at from other angles, maybe overpopulation? Look at Phoenix, the city is now limiting development due to a lack of water. I think you need to inform your self more on this area.

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- Mr. Money Mustache September 6, 2023, 1:38 pm
  
  Yeah, all good points – I didn’t mean to sound like a “just build more sprawl” type of person.
  
  But I think that cities SHOULD open up the floodgates for infill redevelopment – stuff like the old parking lots and abandoned shopping malls that currently take up most of the space in central cities including mine.
  
  But to stop the self-perpetuating problem of crowding and car traffic, make sure you have modern, people-friendly rules in place (which are also builder friendly because we’d rather build more houses rather than wasting land on car parking).
  
  – eliminate “minimum parking” requirements
  – shrink roads and eliminate free taxpayer-paid car parking and make all the asphalt self-funding
  – add super safe and pleasant bike and pedestrian accomm0dation instead, which is more than 90% cheaper to build.
  
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  - Erma September 6, 2023, 4:19 pm
    
    “Infill redevelopment” – I didn’t know there was a proper term for this but YES, that’s exactly what I’ve been saying for years. So much moaning & groaning over the “lack of affordable housing” – and yet, on the flip side, equal moaning & groaning over “strip mall ghost towns” and blighted areas of empty commercial properties. Instead of hacking up and parceling off more farmland and prairie to build overpriced McMansions with postage stamp-sized yards, why not develop what’s already there into housing? There are already all the roads, highways, byways, and parking lots you could ever need. Most also have some sort of parks or green space nearby, unkempt tho they may be, plus schools and access to public transportation. It seems like a no-brainer to me: instead of destroying more of what’s green and unsullied, why not rehab the bounty of concrete & steel & asphalt just sitting empty & unused?
    
    I don’t pretend to understand all the reasons behind it, but I suspect it has more to do with a very few making a very large amount of money, than it does with anything truly prohibitive or “bad for humans” in trying to re-develop urban wastelands into habitable neighborhoods.
    
    What a waste!
    
    Reply
    - Hige Ojisan September 11, 2023, 9:19 pm
      
      From what I’ve heard, commercial-to-residential conversions can be pretty complex, which is why you don’t see that many. The biggest challenges from what I hear are plumbing (offices/storefronts aren’t designed to have bathrooms/kitchens everywhere) and lack of windows (only on the outside, so interior spaces can’t be used as separate apartments). Not impossible, but often the retrofitting can wind up running more than just bulldozing the whole thing and starting from scratch. Starting with a parking lot might be easier.
      
      Some developers are figuring out this puzzle, so hopefully the situation improves. There’s certainly plenty of unused commercial property to repurpose.
      
      Reply
    - jdm September 20, 2023, 10:55 pm
      
      Bottom line is that it’s cheaper (for the developer) to build on fresh land in 95% of the cases. Redevelopment is far more expensive than new development. The costs for new development are often outsourced (new roads, new schools, new utilities, etc) whereas the developer is going to foot the bill on redevelopment (with some exceptions where a state/fed offers incentives for blighted areas, industrial waste sites, etc).
      
      Reply
- Noah September 7, 2023, 4:27 am
  
  Attempting to control overpopulation is an unequivocally bad idea. A horrible scenario is going to play out in China in about a decade due to their one child policy. Most of the first world is heading for a situation of very problematic demographics (too many old people, not enough young). The United States has more or less avoided it, but let’s not manufacture the problem for ourselves in 30 years.
  
  There is plenty of water even in a place like phoenix if it was priced and regulated appropriately, and we would have more than enough space in existing city boundaries if we didn’t subsidize parking and transportation in the worst ways possible. Changing those pricing and regulation schemes are the angles we need to look at, but we definitely need more units of housing.
  
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  - jdm September 20, 2023, 10:59 pm
    
    You don’t solve overpopulation by encouraging more of the same. If we want to live in the modern world, and assume that the world’s poor want to join us, there needs to be a serious recalibration of the number of people on this planet. Right now 350 million Americans use 25% of the world’s resources. Extrapolate that out, even by half, and you can see that 8 billion people trying to live even half as good as us are going to wipe out everything that’s left here.
    
    No, we need less people – a lot less people – and there’s going to have to be a pain point and a recalibration to get there. Either we can do it the easy way – encourage less people and manage the downshift – or we can do it the hard way, with mass starvation, wars, famines, mass extinction, and other fun biblical style events.
    
    Reply
    - David September 26, 2023, 2:42 pm
      
      Instead of somehow thinking up ways to reduce the population, it’s far more product to think of how to use science and technology to solve the problem. Since ancient times, advancements have allowed for more humans on Earth. More humans = more art, joy, scientific breakthroughs, and genius.
      – someone on Team Human
      
      Reply
      - Howard Z. November 23, 2023, 1:08 pm
        
        Oh please, spare me. This is pure, unadulterated magical thinking. Team Human? I’d rather say Team Kool-Aid.
        
        Remember how in the 70s people believed that in the new millennium we would have flying cars and teleportation? The curve of our technological evolution, after a huge leap forward in the 20th century, is inexorably flattening.
        
        Do you know what the difference is? That not having flying cars and teleportation makes us neither hot nor cold, but overpopulation will kill us all.
        
        Sure, we have incredible technologies in development, like nanobots, gene therapies and quantum computers; but nothing that can save us from the overpopulation of the planet should we decide to act like you are suggesting in your reply, which is basically putting our collective heads in the sand like ostriches.
        But above all no science mumbo jumbo can save us from our consumerist-capitalist mindset.
        
        That said, what about continuing to promote scientific research AND also start seriously talking about the overpopulation elephant in the room?
        
        Reply
Thomas September 6, 2023, 3:10 am

I am based in Germany and snagged a historically low interest rate of .87% on my mortgage. The difference is that it is fixed for 10 years so this business of prediction is indeed quite critical to my short and mid term financial planning.

I have had the mindset of paying off the place as rapidly as possible just as a bit of a hedge on the long term uncertainty of life. I figure, worst case scenario with a paid off home I can ride off into the sunset. However, I like my job and see myself in my field at least another 20 years (I am 33). Hence, I have a bit of a challenge as interest rate predictions would seem to drive my behavior greatly:
Option 1 – pay off a super low return mortgage to hedge a long term increasing rate
Option 2 – pay off the minimum on my mortgage and invest the remainder because the delta is so massive due to the historic rate I snagged
Option 3 – some hybrid of the two

There’s the option of an accelerated pay-off of my mortgage every year so I have until December to decide as I save throughout the year, but it is always interesting times as I do find I need to develop an opinion on the whole mortgage situation.

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- Peer September 6, 2023, 10:53 pm
  
  Option 2 makes the most sense to me. If you want to be conservative you can always invest the additional funds in some type of interest bearing account — in the US that would be something like FDIC insured CDs currently at over 5%, not sure what the German equivalent might be. Then, after 10 years you can use everything saved in the conservative interest bearing accounts and apply it to the mortgage all at once. You’ll have benefitted from the difference in interest rates.
  
  Yes, the delta is massive, so take advantage of it if you have the discipline to not spend the money elsewhere!
  
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Dharma Bum September 6, 2023, 7:56 am

As a “long retired Mustachian”, I do in fact enjoy the fruits of high savings, no mortgage, and a healthy lifestyle. I rarely listen to the ‘news”, and refuse to engage in the tribal battles between the left, the right, and the anarchists.

When it comes to “high” interest rates, I simply reflect on the interest rates of my earlier years. 20% mortgages in the early eighties, a leased Caprice Classic sedan at 14% in 1989. A renewed mortgage at 12%. Then I think, man, we are living in GOOD TIMES today.

People who came of age in the era of zero interest rate policy (ZIRP) are akin to crack babies. They were born addicted to cheap money and easy credit. Ultra low interest rates were a powerful drug that hooked millions into a life of materialistic greed and spendaholicism. Well, we’re now into the methadone phase. Time to come down off the high.
Many will be suffering withdrawal symptoms for quite some time.

However, it’s ultimately healthy for the economy in the long run. We don’t need the drug of ultra low interest rates any longer. The financial disease that the drug was meant to cure is over. Now, low interest rates would just be abused by the credit junkies and materialism addicts.

It’s definitely “foot off the gas” time.
Speed kills.

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- Heidi September 19, 2023, 5:52 pm
  
  Great perspective!
  
  Reply
Ball September 6, 2023, 8:07 am

Assuming no debt whatsoever and current rates, would you suggest investing in a money market fund or high interest saving account for any money that is earmarked to be spent in the next 5 years?

Also, Mr. Money Mustache, will you be updating the Short Term Stache post in view of the dramatically different interest rate environment we are in now compared with when you wrote it?

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Beaner September 6, 2023, 8:43 am

Take a listen to Peter Zaihan, geopolitical analyst on youtube. His insights on demographics and deglobalization may be helpful in your investment guidance.

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Bill September 6, 2023, 11:05 am

Can I ask where you all are getting 6% margin loans on a brokerage? I use Schwab and have bought vanguard funds with no commission fees with any money that overflows above our spending, after maxing HSA and 401k. Their margin rates have gone up to north of 12%!! I was using this as “emergency fund” but it’s gotten too expensive for me lately and have resorted to cash buffer in a 4% HYS account like you talk about.

Is this low of a rate a product of having a large balance? While my 401k is pretty stacked, my taxable brokerage only recently cracked the 6-figures. I was going to look for HELOC rates, but even those have been ~8% in my area. 6% would be better than anything I’ve come across yet. If my investment balance isn’t high enough, oh well, but if there’s something I could be using with a ~$100k balance, I’d be all about it.

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- Mr. Money Mustache September 6, 2023, 1:30 pm
  
  Hey Bill – I’m still with Interactive Brokers which often has the lowest margin rates, full details here:
  https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
  
  If you need a referral link to get the new account bonus, you can use this one from my friend Jon, who helps me with this blog: https://ibkr.com/referral/jon189
  
  I have also heard that etrade will compete on loan rates if you talk to them directly – especially if bringing over a large balance. If you have 100k+ balance, there is lots of competition out there for your business! (and you can transfer shares without having to sell them using the ACAT transfer option that all brokerages support)
  
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  - Bill September 12, 2023, 1:04 pm
    
    Thank you so much! I’m not sure how I missed this article, or maybe I just assumed I wouldn’t qualify. Will definitely be checking this out!
    
    Reply
supersaver8675309 September 6, 2023, 1:25 pm

Emma most of this is geared towards people making great decisions 4 years ago or more like locking in pre housing crisis rates and such. What’s the advice to a renter getting hit with the high rents and cant buy a house due to aforementioned issues in article? Anyone else seeing a general loss of hope in the younger generation?

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- Hige Ojisan September 9, 2023, 10:26 pm
  
  I do get the general loss of hope; you have to think outside the box more now than ever. Besides home ownership, with the state of student loans and all the options out there, I wonder how many will decide college isn’t the best path forward.
  
  Re: “can’t buy a house,” I highly recommend challenging that assumption and looking into house hacking in some form. In its simplest form it’s basically just living with roommates in a place that you own, so your roomies pay the mortgage for you, boosting your budget. The most standard formats are rent by the room in a standard place or buying a duplex/triplex/quadplex, but you can also build an ADU/reno a garage, or what we did was split a regular house into two units and live in one side. For more, I highly recommend looking up Craig Curelop, who has both a book and a national network of realtors called the FI Team.
  
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  - supersaver8675309 September 11, 2023, 8:47 am
    
    Love how all the answers about can’t buy a house revolve around, “well then just buy a house and rent with roommates.” Or ” just buy a house a fix it up”. No one taking into account the ridiculous interest rates and out of touch home prices. I’m noticing the comments are getting filtered so not expecting to see this posted. Maybe this whole blog / app is just a constructed narrative for people who bought houses a long time ago and make over 100k a year. If you have that going you’d have to be a idiot to screw that up.
    
    Reply
    - Hige Ojisan September 11, 2023, 9:01 pm
      
      There are ways to make it affordable; the question is if you’re willing to make it work.
      
      A concrete example. I just bought a house in May 2023 at 6.75% interest and 5% down ($22k or so, which should be a cakewalk for most Mustachians), monthly payment of $3100. I have another house right down the street just like it that I converted into a duplex: 3br/1ba on both the first floor and basement (6br/2ba total). Those can both be rented out for $2200-2400 in my market as a standard rental, or for about $800/room if done by the room. So you could either live in one half for less than $1000/mo ($3100 – $2200 = $900), or live in one room and make a profit ($800 x 5 = $4000 – $3100 = +$900).
      
      Does this take some work? Yes. Is it worth it for cheap/free/more than free living arrangements? I think so. And none of this is irreversible: you can kick people out or change the home layout once you pay the place off, increase income, or refinance into a more affordable payment.
      
      Reply
    - Joanna January 17, 2024, 3:32 pm
      
      I find MMM’s blog extremely helpful and much of his advice is very relevant, but yes, it seems like every FI blogger out there worked in tech 20 years ago, pulled down a 6 figure salary and bought a house for a bag of potatoes before 2019. The general advice offered is valuable because so much of it involves lifestyle, but the playing field is so different now that sometimes it feels like they are old men talking to young people about a time that is gone. I am the same age as them lol so I’m not saying they are old, but I wasn’t smart enough to find FI when I was young so I sometimes feel like a lot of their advice is not going to help me or others who don’t own a primary residence and don’t have 6 figure salaries in this post-pandemic world. A lot of the ideas given to young folks are “house hack” “buy a fixer upper” but that is still out of reach and/or complex to navigate with current prices and interest rates. Most townships around me do not want you to chop a house up into ADU’s or multiple units. My cousin owns 60 acres of land but he is not allowed to live on a trailer on that land. I don’t know what the next generation of FI bloggers will offer, perhaps they are already out there and I just don’t know who they are, but I’d like to hear from them.
      
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- Chris B September 15, 2023, 2:27 pm
  
  Maybe think about unaffordable housing in the context of Stein’s Law: If something cannot continue forever, then it eventually must end.
  
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Jimmy T September 6, 2023, 3:11 pm

I’m in the thick of this. I’m moving to a high COL area and am trying to run numbers to see if it’s better to sell my profitable low-nuisance low-interest rate rental to pay down my new mortgage, or eat the higher rate larger mortgage and hope the equity growth of the rental makes up the difference. It’s a complicated equation whose answer partly depends on making predictions about the future. I’d sure love to hang on to the rental asset, but at what cost?

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Robert Reisner September 6, 2023, 10:00 pm

Interest rates are like the weather, easy conversation with anybody but nothing you can really effect. And if it happens to you, it’s usually not tragic. For most people, excessive focus on interest rates can be distracting from more important decisions / choices.

Most people aren’t $250k/yr+ software types. Most people are teachers, government workers, office workers and even factory workers. There are areas of the USA that are frightfully expensive to live in … housing, taxes, transportation and even the need for private education because of failing schools.

For most people the more important decision is where you live and work and not the interest rate on your mortgage. For example, teacher in San Jose CA might make 15%-20% more than a teacher in East Cobb GA. But a home in San Jose will be close to 4x the price of a home in East Cobb. If you aren’t competing with high comp careers, you will have a nicer home earlier in your career and it will cost way less each month. Not everyone wants or can move across the country, but more should consider it. Even lesser distance choices like Sacramento show the difference in lifestyle potential. That $400k home in East Cobb at 8% w/20% down is about $3k/mo (15yr). That SJ $1.4mil home would be over $8k/mo even if the interest rate was half (4%). And the difference in down payment is huge. And taxes and insurance aren’t even discussed here.

Life is easier and way less stressful if housing cost is zero. The path to zero is faster with lower cost housing in lower cost areas. I’ve seen many extended family members move from high cost NYC and NY State. All have better pay, better homes, better schools and way lower cost of living. Life changing for all of them.

For those who live on normal household incomes, where your home is might be way more important than any interest rate.

=====

As far as investments go, if you are not an experienced financial professional or trader, interest rates are irrelevant. You can’t time interest rates or the market. The 80/20 rule (VTSAX/Bonds) rebalanced annually is the safest path for almost everyone. Anything else is really just a guess and sometimes a guess doesn’t work out well.

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- ChrisD September 7, 2023, 2:38 am
  
  Housing costs will never be zero, because you still have to maintain the building. Survey every 8 years, new roof every 50 years, repointing every x years, new y every z years…
  
  Reply
  - Bob Reisner September 7, 2023, 7:53 am
    
    ChrisD: absolutely true. A bit of a rhetorical flourish on my part. But the carry cost of the physical structure is usually a modest 1% or 2% annually. You are better off with only this expense vs this plus mortgage.
    
    But let’s not lose sight of the two key points.
    
    1. A $400k home is easier to acquire, payoff and maintain then a similar home in a HCOL area that costs $1.4 million. Even with a much higher interest rate on the low priced home.
    
    2. Once a home is owned “free and clear”, life is less stressful. More monthly cash to spend or save. Less likely to be tragically impacted by job interruption or negative financial event.
    
    Where you choose to live has much more impact on your financial security than interest rates. Especially if you are a ‘normal’ person vs the huge income technology guy.
    
    Reply
    - Randy September 17, 2023, 4:14 am
      
      Keep in mind that a HCOL area is generally speaking more desirable than a LCOL area, otherwise it wouldn’t be so expensive. A highly paid software engineer in Silicon Valley could live in a much nicer house at a lower cost in a LCOL area even when factoring in the paycut, but for every person that leaves a drove of other people is ready to take their place.
      
      Reply
- Rachael October 5, 2023, 9:48 am
  
  You’ve described our home buying scenario almost to the letter, Texas edition – I’m a native Austinite and never imagined living anywhere more than 50 miles from there, but married a Houstonian whose work life was location dependent. When the opportunity arose we did live in Austin for a while, but “in-town” housing was well out of reach, and suburban housing had already started skyrocketing – renting was getting old, so we returned to the Houston area (which I strongly dislike) but found a nice exurban area with affordable housing. We sort of made our own little bubble based on looking at the upsides – it requires some creativity and adjustment but it’s allowed us a much nicer home, in a quiet well established neighborhood, for less than the going rate of a 3 bedroom apartment. When my husband ended up working in Austin for a while, as life would have it, it was cheaper to rent an apartment near his job and keep this house, than to sell and try to buy something there. We enjoyed a country mouse/city mouse lifestyle for a couple of years, and avoided disrupting our kids routines – more upsides. (It was not a cross country move, I realize, but the cultural differences in major Texas cities are undeniable) I highly recommend relocating, it has saved us over $1M in real estate and taxes, and that’s a conservative estimate. If the need arose again for me to be in Austin regularly, even if our interest rate doubled, I could hire an Uber to drive me, or hop on a southwest flight on a near daily basis and still come out ahead.
  
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Corwin September 7, 2023, 8:06 am

I remember when I first learned that my parents had an interest rate of ~15% on their first house back in the early 80’s (when I was just a toddler). I did not believe them at first, the rate seemed so ridiculously high. And I remember that as I stood their aghast, they just shrugged their shoulders and said that was pretty common back then. That was the first time I looked up the historical plot of interest rates like you’ve shown here, and thus the first time I realized how unusual the crazy low rates we had were.

And it’s amazing how much it changes your household financial decisions as well. For them, paying off the house as quickly as possible was GOAL NUMBER ONE. Which makes total sense: a guaranteed 15% ROI! And thus far less $ went into equities and other investments. Whereas when my wife and I first bought a house 10 years ago and got a nice low rate, we were able to pump a LOT more money into low cost index funds. We have been very fortunate as a result.

But I always come back to the concept I first learned about on this site, the “circle of control” vs “circle of concern”. My parents didn’t have the funds to buy a house in full when they were first starting out of course, and of course they didn’t control interest rates. So they focused on their circle of control and worked hard to pay off the house ASAP, as well as getting a 15 year mortgage instead of a 30 year. Good job Mom and Dad!

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Andrew September 7, 2023, 8:57 am

Pete, this article finally triggered me to comment for the first time since following you in 2015.

Because of this blog, I’ve avoided so many financial pitfalls that I see my peers falling into on the daily. I’m a 35 year-old engineer (pretty typical for this forum) and have lived frugally since I stopped clean-shaving my upper lip 8 years ago. Because of the habits ingrained in me from reading MMM, I can’t help but laugh every time Powell (or Macklem) punches up the interest rates because it has no effect on me. My friends can laugh at my iPhone 8 and 2012 Scion all they want. I’ve actually come to enjoy the teasing because it makes me look forward to my planned career exodus in a few short years.

So from the bottom of my heart, thanks

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Patrick September 7, 2023, 9:51 am

I hoped this was going to have more about what to do about the high interest rates as they pertain to the cash spending reserve most FIRE folks have for 3-6 months of living expenses.

That’s a significant chunk of money and if you’ve ignored the changing interest rates environment you could be getting close to 0% in some checking and savings accounts! Banks have done a terrible job of sharing the federal funds rate – savings accounts are all over the map, and it’s not easy to just open new ones to switch between them when one falls behind.

Bond funds aren’t necessarily a good strategy either, because they’ve lost more in face value than they’ve made in interest.

I guess CDs are starting to look appealing again (feels weird to say because I had kinda written those off as an obsolete relic of the 80’s!). I-Bonds were good for a while, but now have started to drop. At some point, regular bonds will bottom out on their price collapse and maybe be a good move, but that’s a big market timing dilemma.

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- Lee September 14, 2023, 3:53 pm
  
  This is a great question. Is it a good idea to hold bonds or move towards money market funds since they are zero risk.
  
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- Chris B September 15, 2023, 2:22 pm
  
  BIL and SGOV are at the top of the interest rate curve, yield over 5.3%, have almost no credit risk, have almost no duration risk, and have expense ratios of a few thousandths of a percent. These are my no-brainer solutions for cash needed within the next year or two. In the near future, it may make sense to try locking in safe yields for longer.
  
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David Albrecht September 7, 2023, 11:15 am

Great article. 95% accurate and 95% clear. I’d end up sacrificing too much clarity for more accuracy.

One small thing I’d take issue with. The Fed does not set long-term rates. They can control how much money there is which weighs heavily on short-term rates. And they try to keep rates low as their goal is (a) maximizing the rate of economic growth while (b) maintaining full employment (a very tough act to pull off).

But talking about loans over 20, 30 years, the game is about what you expect inflation to be, how much government debt there is, stuff like that. The Fed’s ability to keep these rates low is much less.

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PDBD September 7, 2023, 3:30 pm

MMM, you have been a keen supporter of including REITs in your portfolio. However there are particular challenges for REITs in a rising interest rate environment. Would you advocate holding any existing allocation to REITs or reduce the holdings. Is there an optimum allocation to REITs? I have a 10% allocation and feel uncomfortable with this.

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- Hige Ojisan September 9, 2023, 10:35 pm
  
  If you’re in REITs, beware of anything involving commercial property right now, including bigger multifamily housing. Unlike regular residential loans, these always wind up financed with ARMs with shorter terms, like 5-year or 7-year. With the rising rates, any of these forced to refinance in the current climate are likely to default or be much less profitable if they do survive. Some are forecasting GFC level crashes, this time on the commercial side as opposed to residential (which should be just fine).
  
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- Chris B September 15, 2023, 1:37 pm
  
  Look at the Return on Assets the REIT (or any company) generates. Is this greater than or less than the interest they’ll have to pay to refinance their debts?
  
  If they are earning less on their assets than it costs to finance the assets, expect losses or dividend cuts as they deleverage. E.g. they are borrowing at 6% to hold assets yielding 3%.
  
  Lots of REITs with negative cash flows are in an unsustainable position. It would make sense for them to start shedding assets that no longer earn their cost of capital instead of burning cash while hoping for rates to fall. But when everyone does that…
  
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Kurt Buchert September 8, 2023, 6:38 am

I won’t predict interest rates (a fool’s errand but I’m about to predict interest rates lol), but I believe that rates will eventually come down low again fairly soon due to the fact that the interest on the govt debt is now more than the military budget & will eventually take over the whole budget if rates are lowered. I can’t imagine politicians eliminating all their pet spending. They will just print their way out of the debt.

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- SilentC September 9, 2023, 9:28 pm
  
  It’s possible, but tax receipts are also spiking so I do not think this is an imminent problem. Think about all the boomers now earning 5.5% on their CDs instead of nothing and the big pay raises most people were able to attain not to mention very high employment rates. Check out this link to see the massive increase in collections https://fiscaldata.treasury.gov/americas-finance-guide/government-revenue/ We should be paying down debt but that’s not how politicians roll. I think rates will be higher for longer and inflation will be hard to extinguish and perhaps come in waves.
  
  Another misconception unrelated to your comment that is worth noting is that if the Fed cuts rates that the 10yr and mortgages will come down. They will come down some but that is related to the option adjusted spread on the mortgage (don’t worry about what that part means, that’s maybe a 0.5%-0.75% swing factor). Mortgages price off of longer dated treasury rates (~10yr treasury or blend of 5 and 10yr) and these are already baking in a series of cuts beginning in 2024. So the cuts would need to be more significant than people expect to move mortgage rates significantly. In other words, if the Fed cuts short term rates in an orderly fashion to 3.5% mortgages might not move all (aside from that option adjusted spread) and the yield curve might just look normal again.
  
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Aaron Hemry September 10, 2023, 8:10 pm

Great article!
My favorite part was the analogy of putting the lid back on the ice cream carton of the economy.
Good luck keeping the lid on it, Mr. Powell. We will all want more ice cream soon, won’t we?

I was also glad to hear a little about people lending to people directly. Maybe another article is in order about the various deals flying around MMM headquarters. I’m sure other readers would benefit from those experiences.

My own experience comes from a family that has essentially done its own private mortgage banking for three generations now.
It has worked fantastically…
My grandparents loaned some of their savings to my parents for their first home (higher interest than a CD for them, lower interest and less fees than a bank mortgage for my folks) I distinctly remember the family dinner where they burned the mortgage papers together. I was maybe 12 and it made a big impression.
When it was our turn, my sister and I each turned to the “family bank” to borrow for both our now long ago paid off homes. My parents are doing the same service for my grown children as they purchase their first home.

When I still had the loan, I was happy to pay the interest (6% originally, then 5, 4,3%) to my grandparents knowing that my youthful hard-working energy was helping them out in their retirement. When I wanted to pay extra principal down it was no problem…I just handed them a bigger than usual check as they smiled proudly and teased me that they wouldn’t be able to make any money off me and that I should slow down…
It kind of changes the whole game of low or high interest rates when done this way, and when I’m too old and rich to need it, I’ll still be living in the paid off house (or its successor) when I inherit a bit of that original principal and interest (grown further by subsequent smart investing) so that I can turn around and lend it to my grandkids…
Small scale capitalism at its finest.

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- Randy September 17, 2023, 4:29 am
  
  @Aaron Hemry
  
  How would the family mortgage work if interest rates were to fall or increase dramatically? Is the rate fixed for the borrower, but can be refinanced at any time, or how did that work?
  
  I imagine something like a 2.5% loan made just a few years ago, and now inflation is higher than that. Or a family loan made at 6.5% now, but sometime in the future rates drop dramatically.
  
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SHAHBAZ YUSUF September 13, 2023, 1:50 pm

Re: high home prices – Manufactured homes are an oft overlooked solution (due to historical social stigma) to hack these ridiculous home prices. They are well built with modern materials and technology. So if you are not in child rearing mode and in the retired Mustachian mode and do not want to pay a huge monthly mortgage , buy a manufactured home. 1) It’s a terrific cost solution. 2) 9 times out of ten moving to a manufactured home lifestyle helps you shed all the garbage collected in a conventional lifestyle.3) it will free you up to do other things with your time apart from sitting around and drooling over your house and visiting the church of Home Depot all the time…

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- Chris B September 15, 2023, 1:30 pm
  
  Good point, but the NIMBYs affect the cost of living this way too. Most manufactured homes come with either a long commute or horribly high rent on a tiny plot of land.
  
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- Randy September 17, 2023, 4:37 am
  
  I agree with Chris B. I looked into that a while ago. They seem so much cheaper, but tend to depreciate as they age (which actually makes a lot of sense).
  
  The bigger problem is that one never owns the land, and those ‘trailer’ parks have recently caught the attention from investors, who buy up the parks, then squeeze the tenants to the point where they can’t afford it anymore and it’s too expensive to move the structure.
  
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brad September 14, 2023, 7:17 am

Hell yeah. great article. Thanks as always.

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Chris B September 15, 2023, 1:27 pm

MMM I like the balance when you note that there is an interest rate at which it makes sense to shift from stocks to fixed income. This is un-dogmatic compared to the standard advice people were giving 10 years ago.

Regarding the possible housing bubble, maybe our culture’s obsession with home ownership is reaching problematic levels. It’s scary the level of risk people are taking when they bet that unaffordable prices can stay up forever or when they bet they’ll be able to refinance at lower rates before they go broke. This point when the remaining buyers are desperate to buy a home regardless of the cost might be a good time to sell. In general, we should be wary when the whole herd moves in the same investment direction.

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- Randy September 17, 2023, 4:53 am
  
  I wish we were in a bubble that would burst eventually, but I’m not so sure. There are plenty of other countries that had unaffordable housing for decades. Housing in the U.S. is still relatively affordable for many, hence foreign + domestic investors keep pouring in.
  
  Rents are pretty much tied to the housing market, so there isn’t anywhere to hide. Many folks who are currently priced out of owning would rather have an expensive (fixed) mortgage payment that takes up a large portion of their incomes, than the uncertainty of renting.
  
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Kayvon September 22, 2023, 10:48 am

I could tell that cropped interest rate graph at the beginning would return again with the full picture. With context, it’s easy to see that today’s interest rates aren’t unusual.

It would be great to see that same context added to your graph, “Inflation-adjusted house prices over the last 35 years.” You wrote a terrific article on the Comfort Crisis recently. Part of that striving towards comfort is a tendency to larger homes. When you graph out the “Inflation-adjusted housing PRICE PER SQUARE FOOT”, you add that extra context to see what’s normal.

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- Mr. Money Mustache September 23, 2023, 7:47 am
  
  Oh yeah, good point! Houses get larger and generally higher quality over time (remember 1950s kitchens where the “drawers” were just wooden boxes that you have to clunk in and out without any sort of sliding mechanism?)
  
  But I think in the case of this specific graph – the Case-Shiller index – the prices might be calculated by tracking a fixed batch of houses every time they re-sell to help normalize for the size factor. There would still be quality improvements over time though.
  
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  - Kayvon September 27, 2023, 3:45 pm
    
    That’s a clever suggestion!
    
    Thanks for taking the time to approve and respond. I’m a longtime fan of your writing and attitude.
    
    Reply
Roger September 23, 2023, 4:11 pm

Great article, MMM!

Question for you and the group:
For a family that wants to move to a more desirable but also much more expensive neighborhood, might it make more sense to rent than purchase right now? We’ve got a 2.75% mortgage on our primary home and decent properties in the area we want to be are still going for eye-watering premiums. However, we could rent in our preferred neighborhood for not much more than our mortgage and hang on to the house as an investment, turning it into an income stream while we wait for rates to (hopefully) moderate. This would maintain our Mustachian savings rate while getting us into a compact, walkable, and bikeable neighborhood near a lot of our friends. Thoughts?

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- Mr. Money Mustache September 24, 2023, 2:10 pm
  
  Yes! I often have to remind people that renting is often a better deal than buying in more expensive areas. I might end up in exactly that same boat myself pretty soon as I try out the experience of living in new places in the post-child-raising years.
  
  It’s even better that you still have the other house with a locked-in rate which means you already have a big chunk of real estate in your overall life portfolio. Plus, you’ll be providing housing for somebody else by renting out your current place.
  
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Cindy September 28, 2023, 2:23 pm

Non of this is the way rates work in a free market. the interest rate is supposed to be a reflection of savings. The more supply of savings, the lower the rate that banks can offer. That works out because the savings rate indicates to entrepreneurs that people will have money to spend and the naturally low interest rate encourages entrepreneurs to invest. The FED screws that all up by just printing money to lower the interest rate, causing fans signal to be sent to entrepreneurs and setting them up for the inevitable crash. This was all laid out by Ludwig Von Mises 100 years ago.

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Amanda October 2, 2023, 4:52 pm

One of the things we did when interest rates went up was break out of most of our CD ladder. It was better to pay a few fees to get out of those low rates and get new (much shorter) CDs with high rates.

This was just our emergency fund, most of our money is in the market.

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Saviq October 3, 2023, 2:58 am

“With the current overheated housing market here in Colorado, I’m not tempted to even look at other properties, but someday that may change. And the great thing about having actual savings rather than just a high income that lets you qualify for a loan, is that you can be ready to pounce on a good deal on short notice. ”

As higher income EU citizen, last couple of week I was considering buying house as rental investment. EU house market is similar – higher interest mortgages and higher cost of houses. I even have pre-accepted mortgage by my bank, but I’m more and more leaning to not go trough with the deal. I assume when you say having saving to afford buying house you mean these savings invested let’s say in stock market and ready to be used?

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Chris B. October 30, 2023, 2:27 pm

Hi MMM,

Thanks for your helpful insights. I am a baby boomer gen guy looking to invest in either property or, more desirable, a house that can work as an investment for now and retirement later. I am looking in areas that are either places I want to live later or places that have homes I can afford, and of course – both if possible. It sounds like after reading your article that plowing forward is the best path and not to be too scared by current interest rates. I only have a modest down payment and will need to finance the bulk of the cost, with the hope and consideration to have even a small net income from renting whatever I purchase. Any thoughts on strategy? I don’t currently own a home or property.
CB

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Stephen October 31, 2023, 8:58 am

Love the discussion, but sorry, the salient point here is that we are in a whole new paradigm of interest rates. Higher for longer has become a cliche, but for a reason. See Mr. MM’s long term chart above and look at others. Higher int. rates are here to stay for quite a while. (It’s funny how we can have low rates for soooo long and no one questions it. But everybody thinks interest rates now have to come DOWN.) Mr. MM is right, rates are not so high in the long term scheme of things. So don’t bet on lower rates anytime soon. Meantime take advantage of those 5.5% Treasuries…they’re a gift!

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Larisa November 28, 2023, 10:06 am

Still building my wealth, not FI yet. Also not located in the US, so my mortgage rate is 1,39%. Previously, this was way higher than the savings interest; so besides the money I put into stocks, I paid off the mortgage rather than save more. Now, the savings interest is over 4% which less interesting to pay off the mortgage until the fixed rate expires (I expect it to go way up after that). So I save at 4+%. I feel more comfortable doing that than adding more money to my stocks. Not entirely sound thinking I guess.

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