An 18% increase in home prices over 2.5 years is a lot, but not outrageous. But paired with a huge jump in interest rates, the multiplicative impact on mortgage payments is eye watering. Someone buying the median home at the average mortgage rate today is signing up for a mortgage payment 89% higher than someone doing the same back in January of 2021. Ouch!

That said, it’s not QUITE as bad as it sounds, for a few reasons. First I cherry picked these dates to show the extreme nature. No one is generally buying at both of these dates. The vast majority of us already owned or continued to rent and weren’t subject to this 89% payment hike. Also, this mortgage payment only represents “principal and interest”. To actually buy and own a home, you also have to pay realtor fees or closing costs, property tax, maintenance, insurance, utilities, etc. All that other stuff can make up about half of your total housing cost and it certainly didn’t jump 89%. So the impact to overall housing costs increased somewhat less (little consolation for new homebuyers I know).

Will homeowners with higher mortgage rates be able to refinance soon? I wouldn’t count on it. I think we all got used to some crazy low rates for many years, but if you rewind a little further, rates at 7% (and much higher) were well within the historical norms. Fed chair Jerome Powell recently made comments that were along the lines of “based on 2 year+ projections that have almost no likelihood of accuracy, I could see lowering the rates then”. So I wouldn’t bank on it just yet.

So what to do? Focus on the stuff you can. Increase your income, buy or rent less house, increase that delta between income and spending. Invest the difference. A large pile of cash and investments can help insulate you against rates as it reduces the need to borrow.

As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.

-Jeremy

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