If You Bought a House During the Pandemic Your Cashflow Might Soon Take a Hit
Quarantine dream houses could quickly become nightmares when life goes back to normal
If you bought your first house—or a bigger house— at the start of the pandemic, your net worth has likely exploded as housing prices in seemingly every real estate market have gone bonkers since the beginning of the pandemic.
But inflated net worths driven by rising home prices can mask the harsh reality that as the world continues to open back up in 2022, many recent home buyers are going to experience serious cash flow problems.
Let’s dig into the numbers and explain why.
If you think buying a home is expensive, try owning it for a while
I’ll use the real-life example of a family I know who sold their $700,000 starter home for a dream house which costs $1.25 million. I’ll run through the basic math to show what this decision to buy a bigger house will do to their budget.
The basic numbers.
First, you might be thinking $700,000 for a starter home!? Welcome to pandemic real estate economics. This home probably cost half as much 5 years ago.
Let’s assume this family has $200,000 left on their mortgage, which would give them about $500,000 in home equity on the “Starter home.”
Here’s how that changed their monthly housing costs.
To understand the increase in monthly housing costs, we need to consider how moving from a starter home to a dream house will impact the three primary costs of owning a home.
The mortgage payment.
Property taxes.
Maintenance.
I’ll assume a 2.5% mortgage rate on their current mortgage and their new mortgage in the dream house. As a rule of thumb, we can assume property taxes and annual maintenance both come in at 1% of the value of the home.
Let’s start with the monthly cost of the starter home.
A $200,000 mortgage on a 25-year amortization and a 2.5% interest rate would come in at $896. Let’s round it to $900.
Annual property taxes would be approximately $583 per month.
Annual maintenance would be approximately $583 per month.
The total monthly cost of the starter home = $2,066.
Now let’s look at the monthly cost of the dream house.
Applying their $500,000 equity to the $1.25 million dream home would imply a mortgage of $750,000. With a 25-year amortization and a 2.5% interest rate, the monthly mortgage payment would come in at $3,360
Annual property taxes would be approximately $1,041 per month.
Annual maintenance would be approximately $1,041 per month.
The total monthly cost of the dream home = $5,442
The difference, $3,376, is a 163% increase in monthly housing costs.