a look at mortgages in 1945

Found this mortgage closing statement from Valentine’s Day, 1945 and I was struck by a few things:

·         The home is a two-family in Jamaica, Queens

·         Terms of the loan:

o   5% interest rate on a $3750 balance

o   15 year term

o   Monthly Principal & Interest of $29.56

·         Real Estate Taxes of $158.28 a YEAR

·         Homeowner’s Insurance with an annual premium of $79.80

It made me curious about today.  How does real estate actually perform and an investment hedge against inflation?

A search of publicly available data tells us taxes are now $4650 a year, and assuming an $1800 annual homeowner’s insurance policy, and the automated valuation is in excess of $750,000 for this two-family home in Jamaica.

Let’s suppose our homebuyer in 1945 put down 20%, that would put our home price at about $4700.  In pure investment returns, our $4700 would have to had posted an annual rate of return of 6.8% for the past 77 years to get close to today’s $750,000 value.

Interestingly, the real estate taxes and homeowners’ insurance BOTH have only escalated 4.5%.

Now, let’s talk about the P&I on the 15-year mortgage.  With 20% down, the new P&I would be $5226.64.  The P&I inflation rate is 6.92%!

This would make the mortgage payment $6284…a far cry from the $29.56 in 1945!  So, the annual “inflation rate” on the mortgage payment has been 6.65%!

To qualify, a family would need approximately $180,000 in income.  (and have almost $200,000 in cash for the down payment and closing costs.)  Compare that to the $1,320 in ANNUAL income and less than $2000 in cash needed in 1945!!!

The National Average of Inflation since 1945 is 3.69%. 

Bottomline,

1-      we are spending about 60% more of our income for housing, when compared to people who bought after WWII.

2-      Homes, as an investment, far outpace inflation. And when you add the tax benefits of homeownership, BUYING A HOME IS ALWAYS A GOOD LONG-TERM IDEA.

Just food for thought!