Erdmann Housing Tracker · Housing & Cities
TIER 4 Fri, 6 Feb 2026 14:05:23 +0000
I was back for round two this week with Shane Phillips at UCLA's Lewis Center for Regional Policy Studies. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # Podcast with UCLA Housing Voice - Again! | | Kevin Erdmann --- | Feb 6 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- I was back for round two this week with Shane Phillips at UCLA's Lewis Center for Regional Policy Studies. Last time was about tightened underwriting and the effects it has had on US housing. This time to talk about a mortgage product that I wrote about in a paper I posted at the Mercatus Center. Upgrade to paid Podcast at this link. I am really grateful to Shane for giving me these two weeks on the podcast, and for his thoughtful and generous approach to the ideas. I'm searching, and maybe I never posted anything about this idea except at Mercatus. I could have sworn I had written about it. Anyway, I call it a Fixed Payment/Adjustable Principal mortgage. The basic problem I'm trying to solve is that borrowers want relatively predictable payments. The way we have tried to solve that is by giving them fixed rates. But, fixed rates create risk for the lending. They have to charge us for that risk. And, so the interest rates on fixed rate mortgages are much higher than floating rates - usually 1% to 2% more. It's a very costly fix for borrowers. They want relatively stable payments, but the fixed rate mortgage solves that by bundling it with a speculative position on future inflation, which we don't care as much about. The part the banks have to charge us for is the part we don't care about. And, it's a strange mismatch. Buying a house is already an inflation hedge. When inflation goes up, the house will gain value too. With a fixed rate mortgage, the real value of the mortgage payments decline when there is high inflation. So, the fixed rate mortgage also benefits the borrower if inflation is high. So, paring those to financial pieces makes the borrower a one-sided speculator on inflation. I don't think that's what people buy houses for, and I don't think they would pay for that if it wasn't the only way to stabilize their payments. So, my solution is a product that is simply a floating rate mortgage, but you make payments as if the rate is fixed, and you make up the difference by changing the principal amount. Let's say you've got a $100,000 mortgage, and the mortgage product has a 30 year amortization and a payment rate of 5% and a floating contract rate. So, for the first year, you make $537 monthly payments, or about $6,400 over the course of the year. About $1,400 of that is principal and about $5,000 is interest (simplifying the numbers for clarity). If the floating market rate was only 4% over the course of the year, the bank deducts 1% from your principal, because you overpaid. (You paid 5%, but the market interest rate was only 4%.) You really paid down $2,400 of your principal. You'll continue paying as if your rate is 5%, but next year your monthly payment will only be about $532 because of the deduction in your principal. If the market rate over the course of the year was 6%, then the bank will add 1% to your principal, you will have only paid down the principal by $400, and next year, your monthly payment will be about $542 instead of $537. Since you're spreading the payment mismatch over the life of the mortgage, the changes are very small. Having your payment change by $5 or $10, up or down, each year, is much preferable to taking out a mortgage with a payment that starts out more than $100 more than that and remains so for the life of the mortgage. Or, you could start with a 25 year amortization schedule, and when the principal changes, use those changes to either shorten or lengthen the schedule by adding or removing payments at the end of the loan, maybe with guardrails, so that if it hits 30 years, then you start applying the difference to the payment. Then, you'd have a truly fixed payment for a significant period of time, in any case, and then there would be only small changes after that. Here's Figure 3 from the paper. I'm realizing these charts weren't labeled clearly. What the lines here show is if the household with the median income bought the median new home with a 30 year mortgage. I back-tested it for the years 1954 through, I think, 1990. This shows the minimum, maximum, and average mortgage payment as a percentage of income (assuming average income growth over those 30 years), for a fixed rate loan, an ARM (adjustable rate), and a FA/AP. | | ---|---|--- The ARM and and the fixed rate loans have very volatile starting payments, depending on what the market rate is when you start them. But, they end up becoming very small payments by the end of 30 years because of inflation. The FA/AP has lower and more dependable starting payments. Using a 5% payment rate, it never caused the debt to income level to rise materially above the starting level in any of the back-tested years. And, you can see, mostly what it does is slightly lower the payment amount in the early years, on average, around 20% in the example, typically. And, in exchange, by the end of the mortgage, the payments averaged 10% of income instead of 5%. In real terms, the payments are actually much more dependable and stable than they are with fixed or adjustable loans. More at the links to the podcast and to the full paper. Upgrade to paid You're currently a free subscriber to Erdmann Housing Tracker. For the full experience, upgrade your subscription. Upgrade to paid --- | | | Like --- | | Comment --- | | Restack --- (C) 2026 Kevin Erdmann 548 Market Street PMB 72296, San Francisco, CA 94104 Unsubscribe