On today’s show we are talking about the cost of home ownership and how the consumer price index fails to properly account for housing cost in its metrics.
Agency loans make up 70% of the mortgage market in the United States. These are typically underwritten by Fannie Mae or Freddie Mac as the guarantor of the high ratio loan.
The average down payment is 5%, as compared with the minimum down payment of 3% for the FHA 203B loan. These loans have a 30 year amortization. A year ago, borrowers were paying 3.25% for that loan. Today that loan is pricing at over 6.25%.
At the start of the pandemic the average house price in the US was $374,500. At the end of 2Q 2022, the median house price was $525,000.
So the average loan size increased by 40% from 2019 to today. But in that time, we also have a dramatic increase in interest rates. When you combine the two together, even if we neglect the other increasing costs, just the cost of capital has gone up by 112%.
A mortgage payment on a $374 home with 5% down is $1,548 per month. That same house having gone up 40% in the past two years at today’s 6% interest rate would cost $3,275 per month.
Now housing makes up 40% of the consumer price index. I honestly can’t figure out how the government is computing the housing contribution to the CPI. Rent is part of it, and home purchase price is part of it.
The true monthly cost of ownership has gone up by 112% in two years, and the increase in interest rates is responsible for more than half of that increase in cost. The rise in interest rates is supposed to reduce inflation, and here it looks like the opposite.
Host: Victor Menasce