Those of us who are baby boomers grew up on 7, even 8 percent mortgage interest rates. So why is it such a big deal today that the rates are hovering above that 7 percent mark (7.4 percent as I write this post) and our kids are struggling to close on a house?
Economists have an explanation. In oversimplified terms, it’s because although 7 percent interest rates look similar to the late 20th century, home prices do not.
A WashPost article gives that explanation more depth:
- In 1990, median homes used to cost three times the median income or less in most of the nation’s largest housing markets. Today, that’s true in only three out of 100 markets, according to Alexander Hermann, a researcher at Harvard’s Joint Center for Housing Studies. .
- The average price-to-income ratio of homes shot up in the 2000s when interest rates were low. Amid today’s high rates, it hasn’t come down. That means It’s much harder to afford a house with a high interest rate when the house itself is far pricier.
- Even a low rate that makes the monthly payment manageable wouldn’t help prospective buyers. That’s because they can’t afford the down payment on a house that’s five times their income..
Then there’s the supply side problem.
- In that 20th-century era of high interest rates, homeowners did not factor mortgage rates into a decision to put their house on the market. Today, homeowners are reluctant to give up their low-rate mortgages and sell their homes. That’s putting a lid on inventory.
There’s another wrinkle:
- The WSJ headlined that “America’s New Housing Market Is All About Luxury—and It Runs on Cash.” So, while surging mortgage rates are keeping many buyers on the sidelines, affluent shoppers are pushing overall prices higher with big cash purchases.
Many of us could- and do- help our kids with a down payment. But an all-cash deal–that’s probably beyond most of us.
painting: Rebecca Lemov
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