Why are mortgage rates such a big deal?

[aaronc879]

Only one answer: LBYM. Somehow we managed to.

That's a lot easier for households with a 6-figure income than for those without. Those who make $40K/yr still need a place to live.

 

[Midpack]

That's a lot easier for households with a 6-figure income than for those without. Those who make $40K/yr still need a place to live.

Good luck. There's some willful ignorance going on here with some posting...

 

[aaronc879]

Good luck. There's some willful ignorance going on here with some posting...

I don't know what you mean by that. I guess i'm too ignorant....

 

[Koolau]

I don't know what you mean by that. I guess i'm too ignorant....

Yeah, me too. Maybe a brief explanation.

 

[mwilson]

The plural of anecdote is not data, but here is an anecdote:

Bought my first house for $200k when 30-year was 8%
Same house sold early 2022 for $685 when 30-year was 2.75%

But, median household income in my area for 2000 was $42,148; for 2022 it was $79,057.

Assuming 20% down, monthly payment for 2000 would be $1,174 vs. $2,237, or 33.43% vs. 33.96% of median income. So almost no difference despite supposedly higher demand in general and because of pandemic, as well as no consideration for substantial improvements made to house over that time. Larger down payment, yes, but property tax increases are de facto capped here to 3%.

Of course, the calculus changes drastically if you look at today: a 6.5% mortgage would be a $3,301 payment or 50.1% of 2022 median income (or maybe 38% if income went up 10% y-o-y).

So I sort of agree and disagree with premise of original post. In a "normal" economy with interest rates slowly decreasing (or increasing), affordability was probably about the same. It hurt a bit to buy then and hurt a bit to buy in 2021-22. But a sudden increase of mortgage rates by 4 points (in a year and a half or so) really distorts the market - buyers can't buy, sellers don't want to sell. Something will have to give but it will take longer than when prices were going up.

 

[Midpack]

I don't know what you mean by that. I guess i'm too ignorant....

Posts that claim it’s no different today than 40 years ago financially, and that 20- and 30-something’s today could LBYM just as easily as we did. Plenty of evidence to the contrary, some shown here, and ignored by others with zero evidence. It was not easy - but easier for our generation, some can’t admit it. Housing, education, childcare and healthcare have increased (much) faster than wages, and more than general inflation for some. Competition for jobs is way more global now than 40 years ago. But I’m done with this thread.

 

[madatrub]

The issue, imho, is some of the following:

Median New Car payment (Jan 2021): $609.24
Median New Car payment (Today): $873.33
Increase: 43.3%

Average Combined payments for median home and car:
January 2021: $2010
Today: $3581

Increase of 78.2%

Household income required to qualify for 30/fixed (Jan 2021): $56,040
Household income required to qualify for 30/fixed (Today: $108,320

 

[athena53]

The plural of anecdote is not data, but here is an anecdote:

Bought my first house for $200k when 30-year was 8%
Same house sold early 2022 for $685 when 30-year was 2.75%

But, median household income in my area for 2000 was $42,148; for 2022 it was $79,057.

I'd argue that the people who can't afford the property taxes and the upkeep die or move away and they're replaced by young families with high incomes so yes, the median household income DID increase steeply but that was partly due to the changing population.

DS and DDIL are doing just fine and LBYM on one (good, professional, no college debt) income in Des Moines. I still believe housing is out of range for ordinary folks on the Coasts.

 

[ShokWaveRider]

Good luck. There's some willful ignorance going on here with some posting...

I thought that is what manufactured homes were for.

 

[ShokWaveRider]

That's a lot easier for households with a 6-figure income than for those without. Those who make $40K/yr still need a place to live.

I thought that is what manufactured homes were for.

Just kidding, we were earning $70k between the 2 of us in 1991 when we purchased our first home in the USA at ~9% or so in SoCAL's HCOL Orange County. We did save for 3 years prior to get a decent down payment. It takes discipline and LBYM. Sorry to keep repeating myself.

 

[aaronc879]

I thought that is what manufactured homes were for.

Just kidding, we were earning $70k between the 2 of us in 1991 when we purchased our first home in the USA at ~9% or so in SoCAL's HCOL Orange County. We did save for 3 years prior to get a decent down payment. It takes discipline and LBYM. Sorry to keep repeating myself.

Who can afford a manufactured home now days. The lot rent is too high for the average person. I go on Realtor.com to check out cheap houses in Florida and see mobile homes for $50-100K and think ok maybe I can swing that. Then I look at the details and see you have to pay $1200+ per month just to rent the space the small house is on. I can afford one or the other but not both.

 

[Aerides]

Just kidding, we were earning $70k between the 2 of us in 1991

Equivalent of $156k today. Well above the median income for a 2-income household.

It takes discipline and LBYM. Sorry to keep repeating myself.

Sorry, you don't. But you also seem impervious to the ideas that 2023 is not the same playing field as 1990. There are many other factors in play besides "we saved, you can too, stop whining already" which is the one of many posts in this thread.

And even if one firmly believes that, why bother trying to argue about it?

 

[dobig]

Yeah, me too. Maybe a brief explanation.

Perhaps we should be comparing affordability at different time periods vs blanket comparisons regardless of these factors. For instance, the historical ratio of annual income to housing costs were somewhere around 4x. Today that number is 8x. We have actually exceeding the inflated ratios of the 2008 housing bubble.


We can also see some of the effects of rising home prices and rising interest rates. A person who could afford a $2,500/month payment in 2021 could buy a $630,000 home with a 2.5% mortgage. Today that same $2,500/month will buy a $375,000 home with mortgage at 7%. This would generally be fine as housing prices historically come down when rates rise offsetting the lower purchasing power but that hasn't happened this cycle as home prices have remained sticky. Therefore people wanting or needing to purchase a home today are being priced out of the market. Even on modest housing.


To do a fair comparison, I believe we would need to know the purchase price of a home say bought in 1985 (or any other time), along with that person's income, the interest rate paid, mortgage/taxes and insurance and probably several other factors to see if the comparisons were valid. In other words, if a person was making $30,000 in 1985 and they bought what would be an average home for $100,000, that's probably not a fair comparion to the market today where someone making the medium household income of $70,000 today cannot find a home for 3 to 4 times their income. Not even close.

 

[ShokWaveRider]

Equivalent of $156k today. Well above the median income for a 2-income household.



Sorry, you don't. But you also seem impervious to the ideas that 2023 is not the same playing field as 1990. There are many other factors in play besides "we saved, you can too, stop whining already" which is the one of many posts in this thread.

And even if one firmly believes that, why bother trying to argue about it?

Point taken, "Definition of Insanity." I am most probably old and senile, or at least getting there. BTW insulting folks for their opinions does not help, we still think the same.

 

[mwilson]

<snip>... that's probably not a fair comparison to the market today where someone making the medium household income of $70,000 today cannot find a home for 3 to 4 times their income. Not even close.

Home price to income is not a good metric. Comparing monthly payment to monthly income, which is basically what banks use, is far better.

Before the recent fed rate raises (despite much complaining about affordability from 25 years ago to 2 years ago), this metric has been about the same - 33% in my calculation above. But since the fed tightening, it has increased to about 50% of median household income. That IS a huge hit to affordability.

It's going to take a while to unwind. Selling and moving to a new house purchased at the exact same price would almost double my monthly payment after commission, taxes, etc.

 

[MichaelB]

When we purchased our first home it was 7.5% and went up from there for a while. We managed just fine and FIREd in our 50s. It is only in recent years rates have been so low. It did not hurt us we budgeted accordingly. I actually remember renueing for a year at ~12%, although that did not last long.

If people try to live beyond their means, it is only then it becomes an issue. Surely the same should apply for those what want to FIRE or are FIREd.

There’s no data here so the point isn’t really clear, nor is it clear how the last paragraph relates to the first.

It is worth mentioning that new home construction and sales continue at pre-pandemic levels. New households formations are also higher. So, it seems people are buying new first homes with 6%-7% mortgages at the same rate.

The high mortgage rates do affect resales. Owners of homes with 3% mortgages lose home value if they sell and buy another home at financed 7%. That’s why the inventory of existing homes for sale is so low. This too will pass, although it may take a while longer. It has less impact on new home buyers and greater impact on middle age homeowners, and makes relocation challenging.

 

[Midpack]

Point taken, "Definition of Insanity." I am most probably old and senile, or at least getting there. BTW insulting folks for their opinions does not help, we still think the same.

With all due respect (really), brought on by you and others "insulting" the younger generation.

 

[MC Rider]

How many people can pay cash for a house? Or car for that matter?
Interest rates are important to a buyer unless you pay cash.

 

[Zathras]

When you purchased your first home, COL was dramatically lower. Home prices, along with education and healthcare, have risen much faster than inflation in general - so it's a much bigger hurdle now than when you and I were buying our first home. There are far fewer affordable homes today. Overlay wages not keeping pace with inflation for decades and it gets worse. My first mortgage was a 9.25% ARM, but that's meaningless today.

+1 (*1000)

It is far more difficult to live under your means than it was years ago.

 

[MC Rider]

+1 (*1000)

It is far more difficult to live under your means than it was years ago.

There was no Starbucks then.

 

[Freedom56]

How many people can pay cash for a house? Or car for that matter?
Interest rates are important to a buyer unless you pay cash.

We have always paid cash for our cars. Cash buyers get the best deals and better transparency in pricing. We also paid cash for our last property and we sold it in an all cash transaction. Most real-estate transactions in high demand locations these days are all cash.

 

[PlayinwithFIRE]

-To the OP -

You were lucky your means were above the threshold for housing availability at the time you started. The fraction of people in that position has shrunk dramatically over the years as home prices rocketed past salary increases.

If LBYM results in NO houses available to buy or not even enough for a downpayment - that doesn't make the kids these days a failure or unable to understand the economics. They actually MIGHT be LBYM and still be Years from being able to make a down payment. They might actually be doing it better and with more rigor than you did..Imagine that !

Theres many ways to consider individual success in this world, home ownership is way down that list.

 

[clifp]

Another useful chart.

Thanks, I was looking for that chart. Despite, housing prices appreciating much faster than inflation, the artificially low interest rates have made buying house quite affordable. Far more so than in the 1980s when many of us were entering the workforce.

Interest payments of my 13.75% mortgage on my 153K, (with only 5% down I ended borrowing 150K) in 1984 were $20,625. Significantly higher than $14K in interest I paid for a home mortgage in 2021 of $750K at 1.875% interest despite it being 5 times as large amount. Now obviously total payments were much higher on the more recent loan. But building up equity in your home is a form of forced saving, while spending money only generates a tax deduction and not even that in many cases due to the much higher standard deduction.

 

[clifp]

How many people can pay cash for a house? Or car for that matter?
Interest rates are important to a buyer unless you pay cash.

A surprisingly large number. 36.1% according to this source.
https://www.thestreet.com/housing/a-surprising-number-of-homes-are-bought-for-cash.

As both a rental property owner and hard money lender, I've bought at least 50 homes all for cash since 2010 at prices ranging from $10K to 225K. That said I don't have the money to buy a house in HCOL areas for cash, without a lot of financial shuffling.

 

[Badger]

We bought our first small house in the mid 70s for $8.5k (about $46.5k in today's dollars) at 8.75% when our combined income was $13k (about $73k in today's dollars) while we were just getting started and paying off student loans and a VW beetle loan. The house was an abandoned "fix-er-upper" so there was a lot of sweat and building supplies going into making it habitable. After all the bills, insurance, taxes, building supplies, tool rental, etc. there wasn't much left at the end of the month.
As challenging as it was I don't think it would be possible to accomplish the same today with today's dollars. Where could you find a house for $46.5k or even 3x the price and then afford the materials to make it habitable?

Cheers!