Interest Rates and Income:
a broken system
A few numbers first. In 2020 some people got interest rates 2.9% for a 30 year fixed mortgage . Now they are nearing 8%. The average home price in 2023 is $416,100 and the average income was around $50,000. Let’s break it down.
If you bought a house in 2020 for $500,000 with 10% down at a 2.9% interest rate. Your monthly payment would be $2,631 or a total of $947,160, nearly double the price of the house.
If you bought that same house now with a 7.9% interest rate your monthly payment would be $4,029. Yes you read that right, nearly 53% more just 3 years later. And the total amount you would pay over the life of the loan would be $1,450,440, nearly 3 times the price of the house.
Now, when the interest rates increased by 500 basis points in 3 years the income needed to pay for the average house becomes $13,430 per month or $161,160 per year. Obviously the average house is way out of reach for the average American now, but let’s dig deeper.s remember that the average home price in America is $416,100 and the average income is around $50,000. This means that average American is not even close to being able to pay for the average house. And that is at a 2.9% interest rate without taxes being paid yet.
Now, when the interest rates increased by 500 basis points in the last 3 years the income needed to pay for the average house becomes $13,430 per month or $161,160 per year. Obviously the average house is way out of reach for the average American now, but let’s dig deeper.
Only 34% of households make $100,000/year, so these people could buy the average house in 2020, maybe. But in three years the financial system expects them to increase their base pay by nearly 53%. A completely impossible mandate.
All of this while the money we pay for everything with, including the house you now cannot afford is losing value. For more on this topic read Reserve Rates: https://medium.com/@clipfinance/reserve-rates-2ccaf30247ff
This is yet another article that is attempting to breakthrough the mystery around how modern financial systems are structured and show just how broken they really are.
