In my last article, I made the case for why I believe now is the golden era of homeownership. I want to expand on – and sum up – my reasoning for labeling it as such.
With interest rates at historic lows, homeowners may be living through a once-in-a-lifetime opportunity to grow their wealth faster than otherwise possible. To be clear, the golden era is really for those who own a house financed by a mortgage.
Because mortgage repayments represent one of the single largest expenses for households, low interest rates cut the cost of monthly mortgage payments. As a result, this frees up additional cash flow that can be redeployed for other purposes.
But how big of an opportunity is it?
To answer that question, let’s look at three time periods, each 20 years apart: 1980, 2000, and 2020. The government tracks sales prices each month of new homes sold in the United States.
The median new home sales price in January 1980 was $62,900. In January 2000, it was $163,500. And at the start of January 2020, the median new home sold for $321,700.
Our first step in comparing these different values is to make them equivalent in terms of inflation. As we know, the cost of nearly everything – houses included – increases over time due to inflation.
Adjusting those home sales values to 2020 levels means the inflation-adjusted new home in 1980 would have cost $208,000 in today’s dollars. For the median new home built in 2000, the inflation-adjusted value would have been $249,100. And obviously, the 2020 home would still be valued at $321,700, as no inflation adjustment is needed.
The government also tracks 30-year mortgage rates by week. Here are the rates for each of the three time periods: January 1, 1980 – 12.9%, January 1, 2000 – 8.1%, and January 1, 2020 – 3.7%.
With inflation-adjusted home prices, it is easier to make apples-to-apples comparisons. The inflation-adjusted new home in 1980, using 1980s interest rates, would come with a monthly mortgage payment of $2,285. The monthly mortgage payment for the median new home sold in 2000, using 2000 interest rates, would be $1,838. And in 2020, using today’s mortgage rates, the median new home would come with a $1,488 monthly mortgage payment.
What does that tell us? Owners of new homes built today pay approximately $9,500 less per year than the equivalent homeowner in 1980. Compared to the equivalent homeowner in 2000, owners of new homes built today save $4,200 per year on mortgage payments.
Those are substantial differences.
But that doesn’t even tell the whole story. As discussed in my last article, we also build houses bigger and fancier today. Amazingly, the figures above are not adjusted to account for the differences in square footage over time. The median new home sizes in 1980, 2000, and 2020 are 1,595 sqft, 2,057 sqft, and 2,400 sqft, respectively.
What if a new home was constructed today at the median size of a new home built in 1980? How would the mortgage payments compare? The new home today would carry a shockingly low payment of $989 per month. That amounts to $15,500 per year less in mortgage payments compared to what a 1980 owner would have paid. Sure, the 1980 owner would have refinanced as rates dropped over time. But in doing so they would have incurred refinancing expenses, multiple times, amounting to thousands of dollars in today’s terms.
There are two take-aways from this analysis, in my opinion.
First, and most importantly, those with outstanding mortgages should be leveraging this opportunity to save more for their futures. Investing mortgage “savings” over 30 years could amount to hundreds of thousands of dollars over time in additional wealth.
The second take-away is that if you are set on building or buying a more expensive home in the next few years, it may make sense to accelerate your timeline – finances permitting. You certainly do not want to overextend yourself.
If interest rates remain lower for longer, then timing is less of a concern. Unfortunately, we do not know what the future holds. If rates rise from here, it will cut into the mortgage savings you could otherwise enjoy.
This truly may be a once-in-a-lifetime opportunity. You would do well to take advantage.
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