While housing trends have changed over the years, one has remained stable for decades, and that is the popularity of homes with ample space. The average size of a single-family home has more than doubled from just over 900 square feet in 1949 to an eye-popping 2,480 square feet in 2021. What’s more, a recent survey found that about 60% of respondents said they would prefer to live in large houses in rural areas than in small homes close together. Unfortunately for most of the population, “upgrading” to a large home is no longer as simple and affordable as it used to be. While it’s no secret that mortgage loan interest rates are higher than they have been in decades, few realize just how much it would cost to purchase a home with a bit of extra space for raising a family, starting a home-based business, setting up an exercise room, creating a “man cave”, etc.
Intercontinental Exchange, Inc.’s April 2024 Mortgage Monitor Report has found that upgrading to a home about 25% more expensive than one’s current home would, on average, more than double a homeowner’s average monthly payment. However, principal and interest payment increases can vary greatly depending on geographic location. San Jose and Los Angeles homeowners would see the largest difference in cost, with the average price increase coming to a whopping 140%. This is not just because the current average interest rate for homeowners is so low but also because new home construction has lagged in these large metropolitan areas, limiting the supply of new housing for local residents. In Buffalo, New York, on the other hand, costs would increase by just 72%. Other cities at the lower end of the cost increase scale include Miami, Florida; Cleveland, Ohio; and Oklahoma City, Oklahoma.
Tiered upgrade levels can also affect how much more one would have to purchase a more expensive house. Intercontinental Exchange divides homes into five price “tiers” and explains that moving from the lowest percentile into the second-lowest percentile would increase a homeowner’s payments by 35%. Moving from the second-lowest percentile to the fortieth-to-sixtieth percentile would increase payments by 23%. Moving from this percentile to the second-highest percentile increases payments by an average of 27%; however, moving from the second-highest percentile into the highest one represents a cost increase of 61%. At the same time, one wouldn’t necessarily have to move to a more expensive house to incur higher expenses. Due to high mortgage interest rates, simply moving across the street from one’s current home to an identical one would increase a homeowner’s principal and interest payments by an average of $500 per month. However, even modestly lower rates won’t necessarily decrease costs enough to incentivize homeowners to move into more expensive housing. If the average mortgage interest rate fell to 6%, trading up to a home that is 25% more expensive than one’s current home would represent an average per-month cost increase of 88%. This percentage falls to 68% with an average mortgage rate of 5%.
Investing in housing has always been an ideal way to build equity, as home values steadily rise long-term. Unfortunately, this move has become more difficult and expensive than ever. Rising interest rates have made it difficult if not impossible for many would-be homeowners to obtain an affordable mortgage loan. Furthermore, sluggish new residential construction rates have contributed to rising home values, thus putting home ownership out of reach for millions of people. Even those who currently own a home have faced difficulties as upgrading to a house that is even just a bit more expensive could represent a huge monthly cost increase. Only time will tell when and how relief will arrive as the conditions pushing up home prices and keeping interest rates high are set to remain in place for the foreseeable future.
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