While mortgages have become more accessible over time, the fundamentals haven’t changed. You put a portion of money down, the rest covered by a loan of either 30 or 15 years. The bank collects taxes and holds them in escrow, paying them for you (to lower their own risk). And, if you put down less than 20% of the home value you pay additional insurance against default.
I bought my first condo in Hoboken, NJ in 1995 for $204,000 with 10% down. It was a 1,400 square foot duplex with two outdoor spaces. I remember scraping everything I had to get that down payment (and closing costs, etc). It wasn’t a risk as employment was more secure in those days and I knew I could cover the payment (interest rates were much higher then too).
Buying my first place was fun, I was even offered a job by my attorney! Though, that’s a whole other story.
That was a long time ago. And while I don’t track real-estate prices, I think it wouldn’t be hard to imagine a “starter place” going for $1M or more.
Quick math on what it takes to buy a one million dollar apartment…
20% down = $200,000
Where is a 20 or 30-something without wealthy parents going to come up with $200,000 (plus closing costs, furnishing, etc)?
Ok, so even if you manage to come up with $200,000, that’s still leaves you with the privilege of an $800,000 mortgage. At a 4% interest rate, that’s about $3,800/month not including taxes or building maintenance fees. If we pretend that all in, that’s $5,000 a month, one needs to earn about $100,000 a year just to “feed the mortgage”. (There are some tax benefits to a mortgage, but we’re simplifying here for the sake of illustration.)
And, by extension, if you want to keep your housing costs to 1/3 of your income, that means a family income of $300,000 (which probably still leaves you house-poor).
Put down “only” $100,000 and that adds about $500/month to the payment (plus mortgage insurance). Which rolls up to needing to earn $30,000 a year more before taxes to keep your housing expense inside of 1/3 of pre-tax income.
Even so, I still can’t get past the need to save $100,000 for the down payment. I’d walk down the street sharing this line of thinking with my wife, shaking my head, wondering how no-one seems to notice this. “What am I missing?”, I’d ask, wondering if there was something that invalidates this assumption (that kids who start out like I did 30 years ago have a chance at home ownership in a big city like NY).
This line of thinking is why I took note of this statistic:
— Mike Rosenberg (@ByRosenberg) June 19, 2017
Thats’ not quite as bad as the stats around who watches Fox News, it’s clear that in 10–15 years this is going to have a big impact on things. (What “things”, I’m not quite sure of!)
I don’t have any answers. I wonder if maybe banks could/should do a 50 year mortgage though it sounds a little like indentured slavery to me. I wonder if there are other options that an innovative bank could bring to bear as a way to help people build wealth, through home ownership. There are way that banks help people build businesses and everyone wins… why not similar with home ownership?