The golden era, Part 1
My generation is lucky. When it comes to purchasing one of the biggest assets on most households’ balance sheets, we have a huge advantage. Prior generations would have loved to be in our position.
This advantage should allow wealth to build more quickly for my generation – as long as we don’t squander the opportunity.
The luck we now enjoy is a byproduct of historically low interest rates. The same low rates that are causing a certain pain for older generations with excess savings are a boon for younger generations with debt. This debt could come in the form of student loans or automobile loans, but the granddaddy of them all is home loans.
And the ability to secure a home loan at today’s low rates is nothing short of amazing.
The following chart provides a historical look at how 30-year mortgage rates compare by decade. It is immediately obvious that the 2010s ushered in rock-bottom rates, the likes of which have never been seen before – at least in the past 50 years. Those low rates have carried through to today.COLUMN Justin Lueger
Even the highest 30-year mortgage rate in the 2010s is lower than almost all prior decades’ lowest rate.
Think about it this way. If you purchased a $250,000 home on Jan. 1, 2020, put 20 percent down, and financed the rest at the current average 30-year mortgage rate of 3.74 percent, your monthly payment would be $925. Now, if that same house was purchased with the rates of Jan. 1, 1980, the interest rate would be 12.9 percent. Which means the monthly payment would be $2,196.
Placed in that context, today’s homeowner is “saving” more than $15,000 per year on mortgage payments compared to the same homeowner experiencing 1980s rates.
This is where the opportunity arises. On a relative basis, this means today’s homeowners with mortgages have been given a gift. That gift likely amounts to thousands of dollars a year in mortgage payments that would have otherwise been used to service their home loans.
So, here’s the point: Those with mortgages today should be taking advantage of these historically low rates by saving more for their futures. The temptation will be to spend the “savings” from lower rates. But in order to profit from this opportunity, the urge to spend must be resisted.
To be sure, it’s dangerous making historical comparisons like this. For one, we aren’t experiencing 1980s-style mortgage rates today, nor the sky-high inflation rates that raged during the 1980s. So much has changed from then until now.
For example, in 1980, the median square footage of a new home in the United States was 1,595. Today, the median new home is built at roughly 2,400 square feet. I suspect the average new home in 1980 also came with laminate countertops and vinyl flooring. The average hew home today likely comes with more expensive trimmings – from higher-end countertops to hardwood floors.
In other words, monetary inflation has not been the only reason houses today are more expensive. We also build them bigger and often design and appoint them more elaborately.
Those luxuries are one way to squander the current opportunity. Just because lower interest rates may allow you to purchase a bigger or fancier house than you could otherwise afford, it doesn’t mean you should. Doing so may blow the opportunity to set yourself up for a wonderful future.
There’s more to say on this topic, but space is precious – and so is your time. So, in my next article, I want to dig a little deeper into historical mortgages rates. Even adjusting for many of the variables that have changed over the decades in home construction, I will explain why I believe we are still living in the golden era of homeownership.
I’m sure you can’t wait.
Justin Lueger, CFP, is President of Invisor Financial LLC, a registered investment adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at [email protected]