On this slide, the red line is the 30-year mortgage rate. It's the rate of interest on the 30-year mortgage. And the blue line is the yield to maturity, of a 10-year U.S. federal government treasury bond. And I put the two together on this chart to illustrate an important fact, that the 30-year mortgage rate tracks the 10-year government bond yield. This is a pretty good relationship, isn't it? Well, the reason that there is a good relationship is that there should be one interest rate. Let me clarify one thing. 30-year mortgage, that looks very different from tenure. But most mortgages are paid off in less than 30 years. In fact, this is the way it works. The typical homeowner, that's you coming up, the typical homeowner buys a first home which we call a starter home, when they're in their 20s maybe. And then their jobs tend to be unstable at that. They're moving from one job to another, and they might move several times in the space of 10 years, and then typically, the normal life cycle in an advanced country is by the time you reach 40 or thereabouts, you've now settled down in a job that will keep you for 30 years. Not always but typically. It's a typical life story. And then you buy a house which is your final house, which you live in for 30, 40 years. And then you end up moving to some kind of a retirement community, and then you move to a nursing home, and then you move to the cemetery. That's the life cycle. But look at the housing purchases there. There's a lot of short purchases. And then there's a long one. But we give these people 30-year mortgages even often, even if they're buying a starter home. They never know it's a starter home. They don't like to bring that up. You're buying a home. You're excited, we hope. You've got a house now. And they know that you're going to probably sell it. So anyway, the average time other mortgage actually is outstanding is something like 10 years. Even though it's a 30-year mortgage. So they like to the track, they're doing this deliberately. They're tracking the 10-year mortgage rate. Now why is there a spread though? I said, they're tracking the 10-year government bond yield. Now why is there a spread? See, the bank is charging more than the 10-year rate. Home mortgages are slightly risky. You can see it. Now incidentally, some of them are FHA insured. So there's other mortgage insurance, but they have to pay for that insurance. We just said it's up to one and a half percent. The spread between the two is getting wider now than it was back then. And I think that reflects the costs. And also, a mortgage has to be serviced. You have to send out letters. You have to maintain a system. When people don't pay, you have to call a credit bureau that will nudge them to pay. So all those are costs. But I find it amazing that 30-year mortgage rate, in 1982, got up to almost 19 percent. Okay, that's the interest rate on the mortgage. This is a mortgage rate. But your mortgage payment will be more than 80. Let's just make it simple. You bought all the money to buy a house. Let's say you bought a $300,000 house, and let's say the total mortgage payment is 20 percent. So what's 20 percent? Sixty thousand a year. That's a lot of money, isn't it? How do people do that? Back in 1982, 300,000 would be an expensive house. We could still do that. That's a lot of money to be paying out every year. You know how they did it? Well, they didn't do it. Home prices fell because nobody could afford to buy a house. Some of them did it, and they got their mom and dad's money to buy a house. And I was there. I did that. Yeah, I bought a house in, what was it, 1982. We weren't paying that. Of course, not. That would be a huge sum. Yes, go ahead. Are these interest rates nominal? These are nominal. Yeah, and there was a lot of inflation. But you see the problem, it doesn't matter when there's a lot of inflation or not. Yeah, you're being paid back because ideally, your property is appreciating with the inflation rate, but that's not cash that I have. I have to pay this mortgage. So, high inflation and high nominal rate periods bring in a high mortgage. It makes it difficult to buy a house. But there are other kinds of mortgages. What was prompted by your question is the so-called price level adjusted mortgage or PLAM, which, they made the amortization actually negative. Amortization means, paying off the principal. Your payment comes in two parts. One of them is interest. One of them is amortization. So they had negative amortization mortgages in the first year, so you didn't have to pay 20 percent of the value of your house every year. How can anyone afford that? So PLAMs started to come in this really high inflation period. The inflation rate was double digit in 1982. So there's all these different and that kind of adjustable rate mortgage, is a mortgage that you get it for 30 years maybe, but they don't fix the interest rate. They tell you that your interest rate would equal some short rate, like the one year treasury each year plus something. So it fluctuates with interest rates. Dual rate mortgages, I don't know if they even exist anymore. PLAMs, as far as I know, don't exist. There might be something. You might, if you asked around, be able to get one now. But inflation is virtually zero now, and some people completely lose interest. They shouldn't, by the way, because we're going to have a lot of inflation in the future probably sometime, and the people get kind of unconcerned. The banks are unconcerned. If there's a lot of inflation and you own a house, you're happy. Because now, the real value of your mortgage goes down if it's a fixed rate mortgage but the bank won't be happy. Then there is shared appreciation mortgages. These are mortgages where you pay out some of the appreciation and value of your house in lieu of interest. These were popular in the United Kingdom just before the financial crisis, or just before the 2000s. But they dropped out of favor because home prices went up so fast in the U.K. and people were promising to pay that and they didn't like it. And they got angry, and the whole thing kind of fizzled. So we're still back mostly in the United States with conventional fixed rate mortgages. A home equity loan is a loan on the value of your house that you might take on later as a way of getting money. So for example, for home improvements or you might just take out a second mortgage, and they're often marketed separately. And they were part of what got us into a great amount of debt just prior to the financial crisis because people were first of all, borrowing at a conventional fixed rate mortgage, and then we get an ad saying, "You want a vacation? We'll lend you against the value of your house." So people started borrowing more and more against their house. We had fewer people who had paid off their houses and more and more debtors. And then the financial crisis came. Would you consider inflation being one of the major causes of the depression of housing values? Well, when you bring that up, it brings to my mind the episode just as Paul Volcker became chairman of the FED in 1979. There was double digit inflation, like 12 percent in the U.S. at that time. And so, interest rates were very high. Some people were paying 18 percent a year on their mortgage. It became very difficult for people to afford that interest. And so home prices reached real extreme lows at that time. But they came back. So it's plausibly due to inflation and to the absence of PLAMs, price level adjusted mortgages, that might have made it easier for people to borrow to buy a house.
