High Interest Rates Are Crushing First-Time Home Buyers

September 6, 2023


A Big Squeeze.

There's probably not a topic more discussed nor a metric more closely watched in the real estate market these days than the home mortgage interest rates. They are currently stuck in the mid-7% range for the 4th straight week, which makes it the longest stretch being over 7% in the last several decades.

If you talk to anyone who has owned a home here for a long time, 7% was once the “norm” for home mortgage rates, and they were even higher during gas crisis years of the late 1970's and early 80's. But home prices were also a fraction of what they are now.

So how do these kind of mortgage rates translate when you're talking about real-world monthly payments? What does a 7.58% mortgage really look like?

I created a typical scenario below of a first time buyer trying to purchase an entry level San Carlos home. And the numbers are pretty ghastly:

The True Cost of Living.

It's important to for potential buyers to understand that the “true” cost of owning a home is not just what you owe the bank each month. We commonly use the acronym PITI to more accurately quantify the monthly cost of ownership, which is the Principal + Interest + Tax + Insurance.

The average price for a home in San Carlos still runs about $2,000,000 so we'll use that as our example price. Since these are first time buyers, we'll assume they are “only” coming in with the minimum 20% down payment. I emphasized “only” because that 20% translates into $400,000 of cash. That's a big chunk of change for a first-time home buyer to save up!

That means our fictitious buyers are borrowing 80% of the $2,000,000 purchase price from a bank. In this example, we're going to use the prevailing rate or 7.58% for a 30-year fixed loan. Of course, this figure may vary slightly with other loan options such as Adjustable Rate Mortgages (ARMs) or interest only options. But this serves as a good example to drive my point home.

The figure for property taxes and the assorted assessments that are levied in San Carlos runs approximately 1.25% of the purchase price annually, and we'll use a figure of $1,500 per year for fire insurance (note it will be MUCH higher if you're buying in a high-fire hazard zone.)

So when we crunch these numbers together, what is the true monthly payment (PITI) for a $2,000,000 home in San Carlos with 20% down?

$13,525/month, or $162,300 annually.

Pretty ghastly, huh?

What Kind of Income Do You Need?

While home ownership is still one of the single largest tax deductions that one can claim, recent changes to the tax code have dramatically curtailed how much mortgage interest an owner can write off especially in high cost of living states like California, and calculating the exact write off is way beyond the scope of this post.

For the sake of our discussion, let's assume our buyers fall into the combined Federal and State percentage of 45% — not the top bracket, but pretty close.

So in order to cover the PITI for this home, the new owners will have to dedicate approximately $249,692 of their gross income just to cover the basic cost of the home (prior to accounting for tax write-offs). This doesn't account for any repairs, improvements, or even utilities. It's just the cost of having a roof over their heads that they can call their own.

It's exactly that kind of boulder that is crushing many first-time home buyers in today's market.

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  1. Bruce Cumming on September 7, 2023 at 1:35 pm

    Hi Chuck, Bruce Cumming here, a long term homeowner (52 years) in the White Oaks and faithful reader of your weekly blog. This was a very interesting article about interest rates. Thanks. I mostly agree with your argument about interest rates but I’m one of those Boomers who paid 8.5 interest on our second home purchase in 1976. And yes our home only cost $62,000 on St. Francis Way, but salaries and cost of living were extremely low by today’s standards. My monthly salary was less than $900 . Gas was less than .40 a gallon. $30 a week for groceries was common. San Carlos was essentially an affordable blue collar town with many airport employees, teachers, police officers & others living in town. Today’s high tech salaries seem disportionally high.
    What I don’t understand (and I may be wrong) that home buyers want only turn key houses today . Most of my friends and I bought fixer-uppers with original kitchens, bathrooms, heating systems, holes in the walls and tired yards & roofs. We fixed our homes with sweat equity with some help from professionals, one job at a time. As you know doing remodeling yourself can greatly increase the value of your home. I encourage homeowners to learn home remodel skills. I knew nothing when we moved to our run-down home but learned to sheet rock walls, simple wiring and plumbing, patio construction, landscaping, tree removal, painting, & wall papering . And this was before YouTube!
    So thanks for listening & thanks for your excellent weekly column. My wife and enjoy it.

  2. Chuck Gillooley on September 7, 2023 at 5:09 pm

    Hi Bruce! First of all, thank you for being a faithful reader of the blog! I’m thrilled that you’ve been enjoying the site. To your point — I don’t disagree, and this trend has been a slow, but deliberate movement away from fixing things ourselves. My Dad would have rather died than pay someone to fix or build something that he knew he could do himself! But I don’t blame the younger buyers out there. The demands that come with careers that allow today’s home buyers to even afford a $2M home are incredible. The long hours, travel, and family demands don’t leave a lot of time for being a DIY person. On top of that, we live in a “disposable” society today. Nobody fixes TV’s or computers anymore — it’s usually more expensive to repair than it is to buy something new. But you are correct — with remodeling prices now pushing $700/sq foot and higher, doing it yourself can save a TON of money. Thanks again for your comment!

  3. Bruce Cumming on September 7, 2023 at 10:10 pm

    Thanks for taking the time to email me. I appreciate your point of view and understand how things are today. And believe me, I’m trying not to sound like “some old guy who lives in the past”. However, I must point out that the pressures might have been different 47 years ago than today but nonetheless they were significant. For example, I was working as a police officer, sometimes midnight shift, often weekends , & most holidays. My wife just gave birth to our first child & I was taking 12 units at College of Notre Dame and we were doing basic repairs to our house. For a young couple that was a lot of pressure. Your Dad is not all wrong. I feel as he does that i would rather do something myself if I can as opposed to paying somebody to do it. As I said previously I feel that some folks today want a turnkey and are unhappy if the kitchen is the wrong color or doesn’t have the latest appliances. Thanks again for listening and don’t feel that you need to respond. I merely wanted to offer an opinion from someone that grew up in a different generation with different opinions AND different pressures. Our pressures may have been different but they were challenging indeed!
    Thanks for the work you do in keeping us San Carlos folks informed.

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