I think it’s the hope of all parents that their children will grow up and have an opportunity to have the same or better standard of living than they do. I’m wondering if that hope may be fading for many.
One specific component of that hope for an equal or better standard of living is home ownership. For many, if not most, your home is your largest asset and the opportunity to acquire that asset for younger people is vanishing.
Thanks to years of historically low interest rates, home ownership became very affordable, even more affordable than renting. So people began buying homes, driving up prices. Interest rates stayed low keeping even higher prices within range of many would be buyers. At a 3% mortgage rate, the difference in monthly payments on a $500,000 mortgage and a $600,000 mortgage is only $400. Enter the pandemic and a shut down economy. Those small apartments, condos and homes became even smaller as the pandemic wore on and when things began to loosen up, demand for houses cranked up to a fever pitch. Interest rates were still low and with the high demand inventory became short and prices again ratcheted up.
So much so that right now the median price of a home in the U.S. stands at roughly $400,000. That number was $180,000 in 2015. In just seven years the median home price more than doubled. The average wage has not doubled in that time.
For a variety of reasons coming out of the pandemic shutdown, inflation has reached its highest level in 40 years. A whole generation plus has never experienced inflation in their lifetimes. To combat inflation, the Fed is raising interest rates, and now we see mortgage rates at 6.5% or so. At that rate, the payment on a 30 year mortgage of $400,000 would be $2550, which is the same payment as a $600,000 mortgage at 3%. To qualify for a $2550 monthly payment, the borrower must show monthly income of almost $9000. The Bureau of Economic Analysis estimates as of August 2022 that the median family income is $78,075 or $6506 per month. So as of now, the median family income fails to qualify to buy the median home of $400,000 by a whopping $2500 per month.
Home ownership is becoming something only the wealthy or corporations can afford. What has to change? Increasing supply to where it exceeds demand would certainly lead to reduced prices. But right now, builders aren’t inclined to build much more because building costs are so high and with higher mortgage rates, fewer potential buyers can qualify. Another way to increase supply is to have more sellers, but that isn’t happening because so many people refinanced their mortgages into these lower rates, and no one want to sell and lose that lower rate. Increasing wages so more people can qualify for mortgage loans is another way to help, but higher wages lead to higher inflation and the Fed is bent on reducing inflation to 2% even if it causes a recession and unemployment goes up. Higher unemployment generally produces lower wages because more workers are looking at the fewer jobs available. It seems were in a real catch-22 situation.
Going forward, home buying is going to become more and more a matter of patience, persistence, and a little luck. First time home buyers will have to save more for a larger down payment, and then look patiently and diligently for a home they can afford. It may mean they don’t get everything they want at once, but the important thing now is to get into the game and work towards that better home in the future. The dream isn’t disappearing but attaining it isn’t as easy.
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These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice. Copyright ©2022 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
