In the 1986 movie The Money Pit, Tom Hanks (yes, the same Tom Hanks who has six Oscar nominations) plays Attorney Walter Fielding and his classical musician girlfriend, Anna Crowley, is played by Shelley Long.
They decide to buy a distressed mansion from an unscrupulous realtor friend that is on the market for a bargain basement price. Shortly after taking possession of the house, it begins to fall apart. They continue to pour money and time into the fixer-upper that has now truly become a money pit.
In the same way, the post pandemic era has seen Americans pouring more of their hard-earned dollars into the rising cost of housing over the last couple of years. In early 2020, the monthly mortgage payment to buy a home at a 30-year mortgage rate of 3% or below, was approximately $1,000. As you can see in the chart below, between home prices going up rapidly, due to massive demand and a shrinking amount of inventory, along with mortgage rates now approaching 7%, that same payment has risen to more than $1,816 per month. This is more than an 80% rise for the same home in just over two years!!
Another way of looking at this problem is how much more income would I need to buy the same house today that I would have needed just two years ago? Luckily, the folks at Zillow and Axios recently looked at that issue on both a national basis and for a number of popular cities across the country.
In looking at our next chart, you can see that in many of these cities, your income would have had to increase by 100% or more to qualify for the same house just two years later. We know that most people have not seen their incomes double since the pandemic began. More distressing is that on a national basis, incomes would have had to rise by approximately 88% to qualify to buy the same home.
Data: Zillow; Table: Kavya Beheraj/Axios
All of this is driving up the demand for multifamily apartment units. Unfortunately, the Fed raising interest rates, and therefore mortgage rates, has had the unintended consequence of increasing rent. There are more families now competing for a finite supply of rental units. This is driving rent significantly higher and hurting lower income families that already cannot afford to buy their own home.
We are uncertain of how this will end. However, we know that trees do not grow to the sky and this trend cannot continue unabated forever. One side or the other will eventually break down. Unfortunately, the longer this persists, the more painful it will be for many families.
Most of our clients own their home so this is not an issue for them. However, it could be a very big issue that may impact your kids and grandkids for many years to come. They may be concerned about pouring dollars into their own money pit. We wanted to give you context to help guide them through these very difficult times and decisions. Remember, the Impel Wealth Team is here not only for you, but also for your family. It is part of our mission as we continue “Moving Life Forward”.