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Are Our Kids Homeward Bound?

Are Our Kids Homeward Bound?

April 29, 2024

Growing up, my parents had substantially different musical tastes. Whenever my Dad got home from work, some form of country music would inevitably play on our home record player. It could be Buck Owens, Waylon Jennings, countryfied Jerry Lee Lewis, or especially Johnny Cash. However, when my dad was at work, my Mom had a much more varied musical catalog that we would listen to. This sometimes included cast albums from Broadway musicals, early rock and pop music from the 50s and 60s, and especially folk music. This meant that Simon and Garfunkel were playing on a regular basis, and I became very familiar with their music. This brings us to today's topic, Homeward Bound.

Source: Discogs

"Homeward Bound" is a song by the American music duo Simon & Garfunkel, released as a single in January 1966. It was written by Paul Simon during his time in England, possibly while waiting for a train at Widnes railway station in the northwest of England. "Homeward Bound" appears on the duo's third studio album, Parsley, Sage, Rosemary and Thyme. It was their second single from that album, following their breakthrough hit "The Sound of Silence." "Homeward Bound" peaked at #5 on the Billboard Hot 100, remaining on the charts for 12 weeks.

For those of you who would like a happy song from your childhood, a YouTube link to the song is included below.

Simon & Garfunkel - Homeward Bound (Audio)

Many young people today would also like to be Homeward Bound. However, they are finding the American dream of homeownership becoming increasingly difficult. A number of factors have combined to create a perfect storm that makes owning a home seem like a distant reality for many millennials and Gen Zer’s.  All of this has driven housing affordability to the lowest level it has been since the mid-1980s as you can see in our first chart below.

This includes home prices that have risen by nearly 40% nationally since the onset of the Covid pandemic in early 2020, persistent inflation, which has taken a bite out of young people's available cash flow, and interest rates for home mortgages that have more than doubled over the last two years.

As you can see in our next chart, a recent analysis conducted by Redfin showed that only 16% of homes for sale in 2023 are considered affordable for the typical US household. This was the lowest share on record, and it represents a significant drop from the pre-pandemic averages of approximately 40%, as you will notice below.

I am not sure if the Fed realized that higher mortgage rates, which were inevitable as they began raising interest rates aggressively in the spring of 2022 to combat inflation, would actually cause housing prices to rise as well. You see, anyone who bought a house between 2010 and 2021 likely has a mortgage that is under 3.5% interest.

When interest rates rose to above 7% in 2023, there was no incentive to sell your home with a low-interest rate mortgage and move to one with a much higher rate. This, in turn, kept inventory down, as fewer people put their homes on the market. As a result, high demand for homes was greeted with a small supply. This has kept home prices high and rising over the last four years, making it even more difficult for young families to afford a home.

Higher prices and higher mortgage rates have combined to drive up the amount a homebuyer must earn to qualify for a mortgage. As you can see from our next chart, also from Redfin, buyers must earn approximately $76,000 to qualify to buy a typical starter home in the United States. This data was from February 2024. You will note in the chart below that in February 2020, the amount needed to purchase a new home was just over $40,000. 

Source: Redfin

This has made it more difficult to qualify for mortgages. It also means that the down payment needed to acquire a home is significantly higher than it was just a couple of years ago. Please remember that there are 100 pennies in every dollar. The more of these pennies that are spent on housing, the fewer are left for everything else in your standard of living.

Historically, most CFPs have suggested that you keep your housing costs below 25% of your household income. This is becoming increasingly challenging in today’s housing market. Typically, spending more than 30% of your gross income on housing can leave you classified as house poor. According to the Department of Housing and Urban Development, HUD, households spending more than 30% of their monthly income on housing are likely to struggle financially. 

If you have children or grandchildren who aspire to be Homeward Bound but are struggling with decisions about when and how to make that happen, please let them know they are not alone. Please also let them know that if they need help or advice in determining what they can really afford and how to plan for their housing future, we would be more than happy to assist them. The CFPs of Impel Wealth are here for our clients and their families as we continue “Moving Life Forward.”  

© 2024 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Investors cannot directly invest in indices.

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