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…
In: 233
Decades ago your parents are making $100k, but houses only cost $100k with a 7% interest.
Now, we are making $100k, but houses cost $400k with 7% interest.
Property prices went up dramatically, while salary never kept up. Interest rate increase based on property price, therefore it is worse now
Already answered. Prices have gone 10x whilst your income has only gone up 5x. High prices mean bigger loans, so a 5% rate is infact a 10% “real” rate if the loan you have to take is now doubled. And 20% “real” rate if your income is half of what it should be if inflation adjusted.
Because it was 15% of a much lower number. And not just like regular inflation number, average houses used to cost like 3 or 4 times what an average yearly wage was. Now an average house costs 20 times an average wage.
The market went from low cost high interest to high cost low interest. But in the past couple years we are trying out higher cost rising interest and it is not great
15% interest rate on a 40k starter home is about 6000 a year in interest.
5% interest on a 500k starter home is 25000 a year
And remember the home that was 40k was likely much larger with a yard and all that stuff vs the 500k one now that likely is a semidetached cookie cutter house with very little hard, a comparable house now isn’t considered a starter home and is likely more about 800k or about 40k interest a year.
So let’s remember those 3 numbers , let’s say the person back then is making 10 an hour or 20,800 gross a year or atleast 15k take home , assuming they pay 1500 on the principal each year that means the mortgage will be 7500 a year leaving 625 a month to live off of which was more then enough for a family of 4 to survive on. Now remember every year if they drop 1k off the principal they also save 150 in interest as well.
So now let’s see our modern people and just to knock off 1/30th of the principal in the year it would be 16k on top of the 25k in interest or 41k a year. This means you need a gross income of nearly 55k to just cover the house , no expenses or cost of living involved , just the house.
And remember this is a “starter” home , entry level for people that are young and new to their careers and what entry level young jobs are 26 an hour?
So before it was feasible for one income at 10 an hour to pay the mortgage AND have money left over for a family to survive and now one person needs to earn 2.6x that amount to just afford the house part and the other person is working to essentially afford bills and food
Rates were abnormally low for a long time, so people got used to that. Now, rates are back to a normal range, but that normal range seems really high to some because rates were so low for so long.
We are currently coming out of very low interest rates, coupled with a supply-crisis due to Corona, both of which have sky-rocketed prices, especially in housing, where supply is limited.
The rising interest rates should push down prices, however, since no one is selling (yet) and supply is still limited, prices come down way less than expected. (We have to wait until people have to re-finance their cheap loans to see some forced selling dropping prices.)
Now, since interest rates are high and governments have made building housing expensive (at last here in Germany), no one in their right mind would take up credit and build, right now. Which means the supply crisis will persist.
High prices + high interest rates + low supply + low wages is a really bad combo.
Much harder to make money today due to monopolies like Amazon.
So people rely on loans.
So basically, hyper efficiency in the market leads us to rely on credit – and when credit becomes more expensive, people really feel it.
There’s a video going around with the math on it. If I recall correctly:
– average home price back then was about $49,000
– 20% down payment = $9,800
– average mortgage rate was like 14.7%
– monthly payment would be about $450
– average income was about $21,000
– today the average home price is like $460,000
– so a 20% down payment would be $92,000
– @ 7% the monthly payment is over $2,500
– current average income is like $80,000
– So home prices are 10X more expensive now
– Monthly payments are like 5-6X higher
– Income has only gone up 4X
My mum told me that too, and then she admitted that she had 8% interests on her bank account. Just different times and a different economy
When (early 80’s) inflation was like 11%, I was getting like 16% raises – people these days are getting like 1%, after years and years of other anemic raises.
Back then I was moving ahead despite higher inflation – people these days are just falling further behind. Boomers who say people have it easier now are idiots.
Added: and I got into a well paying career in IT on a 2 year degree and no student debt.
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