I am surrounded by boomers saying this that in their day interest rates were at 15% and we have it easy! I’m also surrounded by the younger generations saying this is ‘not the same thing’
Explain to me the reasoning…
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7% interest rates when home prices are 3x average annual salary: not a huge deal
7% interest rates when home prices are 15x average annual salary: huge financial burden on the buyer
Interest rates are just one part of expenses.
They’re essentially saying even though you’ve been getting a pay cut for the past 40 years and we’ve been steadily increasing prices, and we are now making you pay for more things without any help (health insurance, retirement, etc) – you should be grateful.
If you’re asking for Boomer reasoning, I suspect they aren’t adjusting for inflation and cost of living.
The interest rate in 1981 was about 17%. The median home price was $60k. Inflation adjusted, that’s equivalent to $227k today.
Fast forward to 2023. The median home price today is $410k.
17% on $60k v 7% on $410k. Anyone with a pulse should see why they’re not comparable.
Saving accounts were also giving more than fractions of a percent back then. They ruined it all for us.
The *interest rates* are not worse than the rates of decades ago.
The *effects* of the current rates on an average homebuyer are worse than the rates of decades ago.
This is because the value of a property relative to someone’s average wealth is much, much higher than it was back then.
Because we have substantially more debt on the individual level, the corporate level, and the government level. Homes cost substantially more than they did in the past, and compared to average wages are like 3-5x more expensive than they were back then.
For Example:
In June 1990 the mortgage interest rate was 10.19% and the medium home price was $117,000. That is am $1,182 mortgage payment, and the total cost of the loan was $375,793.
Today the mortgage interest rate is 6.96% and the medium home price is $436,800. that is a $3,248 payment, and a total loan cost of $1,042,223, after 30 years.
The price of the home has tripled, even with a lower rate, meanwhile the average wages have not tripled in that time. And if we ended up at the same rate from back then, the same home would cost another $400k, over the course of the loan.
Why are homes more expensive now as compared to before?
The magic of nuance is that both sides can simultaneously be right and just aren’t understanding each other.
During the 80s and very early 90s the interest rates were insanely high. A home that you bought for $100K would require about $400K in overall borrowing costs to own outright. Because of these insane costs it meant that the kind of homes people could afford was limited. If your parents bought their home in the mid 80s to early 90s it’s likely that there weren’t enough rooms for people and that they did a good amount of renovations. If your bought your home in the early 90s to mid 90s there’s a good chance you had a sufficient number of rooms and it’s most likely a detached single family home
And the reason for this is that the incredibly high interest rates depressed the value of homes. People were offloading their homes in what would be called a crisis. And then interest rates went down heavily which gave people a lot more room to buy “more house.” There were winners and losers in this. If you bought a home as interest rates were going up, you were basically fucked, most of your mortgage would have been at historically high rates. If you bought it in the middle or near the end… you were fine.
And we’re kind of in a similar place right now. Incredibly high interest rates ARE depressing housing prices and are reducing the room people have for buying an expensive house. But we also don’t have any wave or even will for de-regulation of the housing market to allow for cheaper made homes that people would have fiscal space to afford. Because of this, housing prices are only going up…. slower than before.
Simplest way to look at this is how much % of your salary you take each month to pay your mortgage, it is really the key metrics,
This percentage was very high in the spike of interest in 80s (approx 40%) but has been very stable (ish) in the last 3 decades or so (approx 30%), as interest were moving down, home were hiking in price to compensate as people could pay more expensive (not better) house for the same monthly payment with lower interest rate
This has effect has been in full force for at least when interest rate were at 8-9% meaning for the last 30 years, from a monthly payment perspective house have been similarly price has when the boomer paid 8-9% in the mid 90s (30%)
Now, the interest hike we have now is bringing us in the range of the comparable of the 10-14% (range of 40% of take home pay in mortgage per month) they had, we are now in the exact same situation as they were when it was at it’s worse for them
So basically the only chart you need to show a boomer to explain this is the graph % of monthly take home pay spent on mortgage evolution in the last 50 years, it’s relatively easy to understand from that metrics instead of trying to compare house price and interest rate and inflation in an endless debate
Also, one could argue that the lower house price higher interest rate scenario was still better as it was far more profitable/easy to help your situation with unbudgeted cash influx towards the house when the house was 3x your annual salary then when it is 10x and the first down payment was easier to save for as well
Note this is all very average (the 30% and 40%) it represent the average middle class family/house in a generic averaged out market, there’s some market like Toronto that have been above the 40% since before the pandemic crazy house price hike and now the interest hike
Because the people complaining now have **NO IDEA** how bad inflation got in the 1970s. This was back when union membership was four to five times as what it is today, and they had COLA contracts which pegged wages directly to inflation, so that every time prices rose, wages rose, which made prices shoot up. It was a crippling vicious cycle, and by 1980, inflation was at 14%, and the only way the Fed could stop it was by **HAMMERING** the economy with massive rate hikes. They all but put companies out of business by making the cost of borrowing beyond their reach, and by 1982, unemployment was at 10.8%, higher than it ever got during the Great Recession.
Listen, I’m not saying there aren’t people who have it bad now, but it’s not as bad as the 1970’s. The only difference is that people who were out of work and broke in the ’70’s couldn’t jump on social media to vent their anger.
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