At the time, the Case Shiller National Home Price Index had just hit a new all-time high for a year-over-year price increase of around 20%.
This meant that monthly mortgage payments for average single-family home prices were hitting all-time highs:
But if you adjusted those monthly payments for inflation, things didn’t look so bad:
Adjusted for low interest rates and inflation, mortgage rates were much higher in the 1980s and 1990s.
But it was the low mortgage rates that really helped that affordability. Here’s what I said at the time:
The only variable that could change this equation would be higher mortgage rates.
In my example above, a $ 308,000 home with 5% mortgage rates would be a monthly payment of $ 1,322. A $ 367,000 house would be $ 1,576 a month. These are increases of around $ 300 per month versus 3% in mortgage rates.
The rate hike has even more impact than the price hike on monthly payments.
If rates were to rise substantially, you’d expect house prices to drop, at least in theory.
The worst case scenario for potential first-time homebuyers would be mortgage rates going up while prices don’t go down. Demand would surely subside if rates exceed a certain threshold, but I have no idea what that threshold is. And there is no guarantee that home prices will drop immediately if rates rise.
Well, mortgage rates have risen, more than doubling from those levels to over 6%.
Let’s take a look at these charts just a year later. The average mortgage payment is now off the charts due to the continued rise in house prices and much higher mortgage rates:
Look at that love at first sight. Not good for those who want to buy their first home.
Now let’s see what things look like based on inflation:
This is the worst level of inaccessibility we’ve seen since the late 1980s and it happened in the blink of an eye.1
The home ownership rate in the United States is around two-thirds:
If you are one of the lucky people in this group who bought a home before 2022 and locked a rate of 3% or lower, these accessibility numbers are not important to you (unless you plan to trade higher). .
And it is luck if you have happened to buy or refinance in the last few years.
Let’s say you are an older millennial who bought a home between 2015 and 2020.
The value of your home has probably increased by 40-60%. The rate on your mortgage is around 3%. This means the Fed’s short-term lending rate is now higher compared to your fixed rate mortgage, which appears to be one of the best inflation hedges you could ask for. Your payment is fixed and you are much richer since the house price boom from 2020.
But what if you’re a younger millennial or Generation Z person living in a big city or lost your window to buy a house?
Your rent is increasing rapidly. Buying a house is now much more expensive and more or less inaccessible for many young people. The best solution is to buy a seat with a high mortgage rate now and hope the Fed will lower rates after they send us into recession so we can refinance. Choose your poison.
If you’ve ever bought cheaper prices with lower rates you’re not a genius. You were lucky.
And if you haven’t bought cheaper with lower rates you’re not an idiot. It was a case of bad luck.
Unfortunately, luck permeates a large part of your financial experience.
I calculated the numbers on an annual $ 10,000 investment in the S&P 500, adjusted for inflation, and the results are all over the map:
The difference between the best and worst outcome had nothing to do with the individual diligently saving money and everything that had to do with the moment he was born and started saving.
If you’ve had the bull market of the 50’s, 80’s, 90’s or 2010’s behind you, you’ve done really well in the stock market.
If you’ve ever started investing in the 1930s or lived in the 1970s or 2000s, not that much.
Unfortunately, much of what happens with your financial life is out of your control.
You have no control over what happens in the stock market, real estate market, bond market or commodity market. You can’t control inflation or interest rates or tax rates or the Fed or the kind of financial situation you were born into.
You can check your savings rate, asset allocation, diversification and work ethic.
It may not seem fair, but sometimes you just have to play the cards that are dealt to you.
Michael and I talked about good and bad luck in the real estate market in this week’s Animal Spirits video:
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How the Fed has ruined the housing market
Now here’s what I’ve been reading lately:
1And it’s worth pointing out that I only have data up to July 31, 2022. Mortgage rates have gone up since then and house prices haven’t softened yet, so it’s only gotten worse.