If you’re in real estate, it’s highly likely that you’ve heard a seller say something to the tune of: “I’m not paying their closing costs.”, “I paid mine, why should I pay theirs?”, “Do people not have any discipline any more?” The list goes on. Some sellers have a hard time understanding why a buyer can’t pay for their own closing costs.
It’s a fair question, really.
I’ll attempt to shed some light on the material facts of the situation. I’m not here to speculate as to what someone spends their money on. And I’m not pointing fingers at any particular generation. I’m just trying to effectively illustrate the difference in the power of the dollar between 1980 and now. If we can surmise that it is, in fact, more difficult to save money now than it was in 1980, great. If we can’t, great. Either way, I am going to learn a WHOLE lot through writing this and I hope you can at least learn a little from reading it.
A large portion of this blog will be devoted to listing out differences in prices between 1980 and now, compiled from an amalgamation of random different websites and blog articles I found (sources cited in the last section).
The first part, Section 1, where I paint the picture of two different scenarios (a John Sr. in 1980 and a John Jr. in 2020), is written using all of the information listed in Sections 2-4. I’m not going to bore you unless you want to be bored, so if you only want to read Section 1, that’s perfectly fine. You’ll just have to trust my numbers if you’re not going to read all of them for yourself. Okay, without further ado, the article is written in the following order:
- Tallied differences, Then vs. Now, from a monthly household budget’s perspective
- Inflation: Income (Increase Ratios)
- Average income (in current dollars)
- Then
- Now
- Percent increased
- Average Income (in real dollars, to factor out inflation)
- Then
- Now
- Percent increased
- Compare the increase of real dollars income vs the increase of inflation
- Explain real vs current dollars, and why we care
- Cost of things, then vs now
- College
- Groceries
- Average price of homes/cars
- Phone/TV Service
- Fast Food/Restaurants
- Clothes
- Health/Medical Costs
- Loan Requirements/Costs
- Sources
If you’d like to just read the first section, that’s perfectly fine. You’ll just have to trust my numbers if you don’t read through them all. So, let’s get this going.
- Tallied differences from a monthly budget’s perspective (really draw a concise contrast, here)
So, now it’s storytime. Let’s look at the differences between a consumer’s purchasing power vs the purchasing power they have now:
John will be our 1980 consumer. He’ll be 25 years old, married, 2 kids, and the sole provider of his household.
John Jr. will be our 2020 consumer. He’s also 25, married, 2 kids, but he and his wife both have to work.
John makes $25,000 just out of college as an engineer. He was able to save up and pay for whatever parts of his school that wasn’t covered by scholarships so he now has his education debt-free.
John’s monthly income is roughly $2,100.
His monthly expenses are as follows:
Rent/Utilities: $350
Car payment (and insurance): $150
Groceries/Dining: $250
Health (Insurance/Medical Bills): $92
Recreation (movies, hobbies, etc.): $75
Total: $917
So, after taxes, which were 22% in 1980, John’s monthly net income is right at $1,638. And seeing as John pays out less than half of his monthly income in monthly expenses, and factoring out for income taxes, this means John is still able to store away upwards of $500 PER MONTH ($721 per month, to be exact) into a savings or retirement account (maybe even a pension, which is now a thing of the past) while living in a single-family home, with a wife, two kids, and a single income. That’s pretty swell, John.
Now, John Jr. just graduated college with the same engineering degree John Sr. did, but he graduated with a little more debt than John Sr. did. He had to pay 260% more for the same degree, from the same school, that John Sr. did, which means he had to incur student loans and put some of his books on credit cards.
Except here’s the kicker: when John Sr. went to college, about 53% of the nation was going to college, so the degrees meant more. When John Jr. enrolled, back in 2015, over 90% of the nation was attending college, so the degree didn’t mean quite as much, which means it was a little tougher for John Jr. to find a job.
But all that aside, John Jr. did eventually find a job, and he started out at $50,000 a year as a paid intern at an oil firm. So that would mean his monthly income is right around $4,150. And his wife, Erica, works as a school teacher, which also requires a four-year degree, and more student loans and more credit card debt, and her starting salary is around $32,000 a year. So, their total monthly (gross) income is right around $6,800. Here is a look at John Jr. and Erica’s monthly expenses, though:
Rent: $1,200
Student loan payments (combined): $450
Minimum credit card bill: $275
Car (without insurance): $450
Daycare: $1,000 ($250/wk for 2 kids, it’s real, I promise)
Health Insurance/medical collections: $750
Internet: $50
TV/Cable/Streaming Services: $200
Groceries/Dining: $850
Total: $5,225
So, factoring out 17% for taxes, that brings John Jr. and Erica’s monthly net income to $5,644, or just $400 more than their monthly expenses. John Jr. and Erica pay out nearly all of their monthly income, just to survive.
John Sr.’s monthly expenses were 56% of his net monthly income.
John Jr. and his wife Erica’s combined expenses are 93% of their net monthly income.
So, you could imagine that it would be remarkably hard to save any money, in the first place. But then when you factor in all of the new regulations doled out by the two Government Sponsored Enterprises (GSE) that comprise the secondary market, Fannie Mae and Freddie Mac, the two behemoths who decide the regulations on conforming loans (AKA, Conventional loans, normal mortgages), you start to see that they’re lowering DTI limits, they’re tightening guidelines in response to COVID, and just generally making it very difficult to get a loan, and you’ve got a recipe for two people who are going to need a lot of help getting a home.
Because once they jump through all the lender’s hoops, they’re going to get a massive bill. To break down a buyer’s closing costs.
They’re going to have to pay the down payment. 5% of the median home price of $304,100 is $15,205. Considering John Jr. and Erica’s ability to save money at the rate of $400 per month, it will take them either a miracle or more likely, 38 months, (THREE YEARS AND TWO MONTHS) to save up for just this one facet of their costs associated with purchasing a home.
To put this further in perspective, John Sr.’s luxury home down payment was $3,700. Considering he got to stash away $721 per month, it would take John Sr. a little over 5 months to save up for his forever home.
And remember, this is one facet of a buyer’s costs. So, assume they saved up the down payment, and 3 years and two months, they think they are ready to buy. But then the lender says, “Actually, you also have to pay for title work, title insurance, a title opinion, origination fees, homeowners insurance, prorated taxes, inspection fees, appraisal fees, and a billion other things, and, including your down payment, your total amount due at closing will actually be around $23,000. Of course, with your conventional loan, you can have the seller pay up to 3% of the purchase price toward your closing costs. Or you can save up every month to cover the additional $8,000 in costs.”
So, now John and Erica have the option of negotiating in closing costs and buying right now. Or saving up the other $8,000 over the next two years, roughly, and then finally buying, after renting for the past 5 years.
What would you do if you were John and Erica?
And maybe, just maybe, before you just assume a buyer has been irresponsible with their money, unless you’re coming from the exact same situation, consider the fact that we do not live in a world where it is easy to have surplus cash every single month. Also, something sellers don’t often think about, when you’re dealing with a buyer who just wants to buy but can’t afford all of the costs on their own, they give you the power during a negotiation. They are in no position to play hardball or drag out negotiations. They just want to buy a house, stop renting, and hopefully, start building some equity so that they can stop living paycheck to paycheck. You have the opportunity, as a seller, to get what you want AND give them something they want. That’s a beautiful thing.
Something else to consider, and I’ll leave you on this note: a single real estate transaction, on average, generates $43,000 into the immediate, local economy. This is including the average equity received, title companies being paid, lenders being paid, real estate brokerages/agents, all of it. I know you’re not selling your house to save the economy but think of this if you’re ever selling the house for a little bit less than you were hoping. Think about all the good you’re doing for people in your own community. Thanks.
- Inflation: Income Increase Ratios –
- Inflation rate – “According to the Bureau of Labor Statistics consumer price index, today’s prices in 2020 are 214.44% higher than average prices since 1980. This means that a dollar today only buys 31.80% of what it could buy in 1980. The U.S. dollar experienced an average inflation rate of 2.91% per year during this period, causing the real value of a dollar to decrease.” In other words, $100 in 1980 is equivalent in purchasing power to about $314.44 in 2020, a difference of $214.44 over 40 years.
- Income – Average income (in current dollars):
- 1980 – 21,063
- 2018 – 90,021
- Total increase = 327%
- Income – Average income (in real dollars, AKA factoring out the 214% inflation of past 40 years):
- 1980 – 61,283
- 2020 – 97,332*
- Total increase = 59%
- *This is an independent calculation using the inflation rates for 2019 and 2020 found here: https://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/
- So, the average income, after factoring out inflation and therefore leveling (or at least sterilizing) the playing field, has increased from 61,283 in 1980 to 97,332 in 2020. That’s a 59% increase compared to a 214% increase in inflation. It literally doesn’t add up.
- Current vs Real Dollars – Current means the power of a dollar at the given time it’s being analyzed. Real means the power of a dollar throughout time, seen through the lens of the value of a dollar now (or whenever you’re reading it and applying the analysis).
So if you picked up a Sears catalog from 1980, and browsed through and saw all of the products listed for sale, the prices you’d be seeing would be current prices, as they were priced for the time that catalog was printed. But if you were to take that same catalog and apply the aggregated inflation rate from then to now, the adjusted prices would be the real dollars.
So, in essence, to see a fair comparison of incomes, the great (un)equalizer—in this scenario—is the inflation rate. We can look and see that income has increased from $21,000 in 1980 to $90,000 in 2018, and think, “Wow! A 327% increase! That’s awesome!”
But if we don’t factor in the increase in prices, and thus the decrease in the power of the dollar, we aren’t getting an accurate comparison. Income doesn’t increase in a vacuum. The world is not static. So, we need to be able to say “Okay, they made $21,000 in 1980. How much would that buy them now? And to answer that, we factor out inflation, and we come to the conclusion that, in 1980, having $21,000 was the same as having $61,000, now. And since our current dollar is actually current, we cannot make a “real dollar” application, since we’re missing the necessary element of time past. We are current. “Real dollars” is only a formula for past values.
- Cost of:
- College – In 1980, the average cost of tuition, room and board, and fees at a four-year post-secondary institution was $9,438, according to the Department of Education. That number has since climbed to $23,872.
- Groceries –
- Then – You could buy a Kenmore electric range for $299 and a Kenmore refrigerator for $449, but spending $1 at Sears would be like spending $3.10 today — Milk: $2.18 per gallon, Eggs: 83¢ per dozen, Tuna: 99¢ per can, Bacon: $1.39/half pound
- Now – Kenmore Electric Range is $539, a refrigerator is $990, Milk is $3.50 per gallon, eggs are $1.24 per dozen, Tuna is $1.20 per can, bacon is close to $5 per pound, (all dependent on brand, obviously).
- Average/Median Sales Price (cars and homes) – 1980 experienced one of the largest year over year inflation rate increases in American history at 13.5% (average for past 40 years is 2.91%, as mentioned earlier). And housing prices in 1980 increased even more than the inflation rate, at 15.69%. The average year over year increase over the past forty years is only at 3.06%. But yet, somehow, the average home price has increased far beyond either of these numbers.
- 1980 Average home price (in current dollars) – $47,200
- 1980 Average home price (in real (or “today”) dollars) – $147,532.65*
- *Used the calculator that applies Consumer Price Indexes (CPI) from any chosen year to any chosen year. See sources.
- 2020 median home price – $304,100
- Increase in home price (current to current) – 544% increase
- Increase in home price (real to current) – 106% increase
- Average rent for 1980 – $243
- Average rent for 2020 – $1,463
- Average car cost 1980 – $7,000
- Average car cost 2020 – $37,851
- Conclusion: No matter which way you split it, homes (and cars) cost drastically more than they ever have. Even factoring out inflation, we still see 100%+ increases. No wonder people have a hard time affording homes. They’re 500% more expensive than they used to be.
- Phone/TV Service (not including internet and all the spending opportunities that generates)
- There were only home phone services (for the most part) in 1980. These services were far less expensive than the services we pay for today. But, in fairness, they do a minuscule fraction of what our phones today, do. But it’s also safe to say that, $200+ per month on phone service was completely out of the question. And their TV service, while a far trimmed down version of what is available today, was never going to be in excess of $40 per month. Now, with the right cable package, a person can spend more than $150 per month. Easily. So between TV and Phone, what used to cost someone a combined (approximate) $50, can cost someone well over $350 a month.
- Fast food/restaurants
- The Big Mac Value Pack, precursor to today’s Extra Value Meal, sold for $2.59 in 1985, which amounts to $6.09 in 2018. Even adjusted for inflation that’s still not enough to buy the large Big Mac Extra Value Meal today, which sells for $8. This is just one example, but I don’t have to convince anyone how expensive food is, today. I could spend $25 at Sonic; BY MYSELF. Granted, I’m not the model of moderation or fitness, but I’m not going to be breaking any voluminous eating records with that $25. The only thing I’ll be breaking is the bank… and my dignity.
- Clothes
- 1980s (offering a range from normal – high-end brands):
- Jeans – $15 (Levis) – $60 (Guess)
- Shoes – $5 (Jellies) – $70 (Timberland Boots)
- Sweaters – $5 – $20
- Jackets – $40 – $100
- A full suit – $200 – $500
- 2020 (offering the same range):
- Jeans – $30 (Levis) – $500 (Saint Laurent) (Average is probably around the $150 mark.
- Shoes – $25 (Tom’s) – $65 – as much as you’d like to spend, i.e. Air Jordan’s, other high-end brands capping $500 – $1,500.
- Sweaters – $12 (Hanes) – $90 – $2,500 for higher-end brands, i.e. Brooks Brothers or Tom Ford/Neiman Marcus.
- Jackets – $50 (West Louis) – $130 (Carhart) – $229 (Banana Republic) – $650 + (Canada Goose, Brioni, Armani, etc.)
- Men’s Suit – $120 (off-brand/online) – $500 – multiple thousands (Brooks Brothers, Armani, Gucci, Burberry, Dolce and Gabbana, etc.)
- Health insurance/Healthcare (costs per person computed on a national average) –
- 1980 – $1,108 (Current Dollars) $3,378.19 (Real Dollars)
- 2020 (2018, actually) – $11,172 (Current Dollars) $11,522.02 (Real Dollars)
- Increase (in current dollars) – 908%
- Increase (in real dollars) – 241%
- So no matter which way you split it, we’ve well-outpaced inflation in this arena.
- Loan Requirements/Costs
- Requirements – The requirements behind getting a mortgage now, vs just 13 years ago, in 2007, are night and day. Now, you can’t even refinance a house you already occupy without providing the lender with every piece of financial documentation that has ever had your name on it, providing hair follicles, blood samples, and the left pinky of your firstborn child, removed during the Blood Moon. Okay, not really all of that, but if you’ve never mortgaged a property in the past 13 years, just take my word for it that the underwriters will require SO INCREDIBLY MUCH. And that’s thanks to the government becoming involved after 2010 and the initiation of the Dodd-Frank Act; and thus, the Consumer Financial Protection Bureau (CFPB).
- Costs – Everything costs more, as we have well-established. Buying a home is no different. Appraisals, abstracting, title opinions, taxes, insurance, title insurance, you name it, it’s more expensive than it used to be.
- Sources:
- Inflation increases, 1980-2020: https://www.in2013dollars.com/us/inflation/1980,
- Average income (plus adjusted for real dollars vs current dollars): https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html, Table H-6. Regions-by Median and Mean Income, All Races
- Cost of College: https://www.businessinsider.com/this-chart-shows-how-quickly-college-tuition-has-skyrocketed-since-1980-2015-7#:~:text=In%201980%2C%20the%20average%20cost,has%20since%20climbed%20to%20%2423%2C872
- Cost of Groceries: https://www.tasteofhome.com/collection/this-is-what-groceries-cost-the-year-you-were-born/
- Cost of Fast Food: https://www.tasteofhome.com/article/what-the-mcdonalds-menu-looked-like-the-year-you-were-born/
- Current – Real Calculator: https://stats.areppim.com/calc/calc_usdlrxdeflxcpi.php
- Cost of homes in 1980 – https://www.cnbc.com/2017/06/23/how-much-housing-prices-have-risen-since-1940.html
- Cost of homes in 2020 – https://www.nar.realtor/research-and-statistics
- Fast Food – https://www.kiplinger.com/slideshow/spending/t050-s001-how-much-did-things-cost-in-the-1980s/index.html
- Healthcare/Insurance – https://www.thebalance.com/causes-of-rising-healthcare-costs-4064878