NerdWallet's Smart Money Podcast - Navigating Surging Mortgage and Child Care Costs

Episode Date: February 21, 2024

Explore strategies to navigate surging mortgage and child care costs so you can meet your goals despite rising expenses. How are rising mortgage and child care costs impacting the typical American family? Hosts Sean Pyles and Anna Helhoski tackle the pressing issue of the dual financial burden faced by many households today. They discuss the nuances of the affordability crisis before NerdWallet writer and mortgage expert Kate Wood joins them to shed light on the housing market dynamics, explaining how supply and demand, coupled with higher mortgage rates, are contributing to soaring home prices. They also share insights into the outlook for mortgages in the coming year and practical advice for prospective homebuyers, especially those grappling with high child care costs.  In their conversation, the Nerds discuss: mortgage costs, child care expenses, housing affordability crisis, financial challenges, high mortgage rates, home buying strategies, economic realities, rising living expenses, practical solutions, affordability crisis, real estate analysis, family finances, household income, affordable housing, child care budgets, housing market dynamics, financial well-being, financial impact, creative living situations, navigating expenses, financial resilience, child care subsidies, housing market trends, mortgage rates outlook, prospective home buyers, housing market outlook, financial insights, and financial strategies. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. Today, we're going to talk about a new analysis of mortgage and childcare costs

from the real estate website, Zillow. The report found that the typical household looking to buy a home in 31 out of 50 of the largest metro areas can expect to spend 66% of their income to cover both a mortgage and childcare. Oof, and listeners, for context, that's up by nearly 50% from 2019.

The monthly median household income is $6,640. That typical family is paying about $2,000 a month for their mortgage payment and another roughly $2,000 per month for child care for two toddlers. With those costs, families are left with less than $2,700 for all other necessary expenses like food, health care, and transportation. It leaves little, if anything, for savings or extras. Federal guidelines for affordable housing and child care budgets recommend that housing should cost no more than 30% of a family's monthly income, while child care should have cost no more than 7%. But the Zillow analysis found that the typical household exceeds the guidelines for both of these in most places it measured.

This dual cost burden is worse in some of the most expensive areas of the country. Some of the highest are unsurprisingly on the East Coast, places like Boston, New York, and Providence, Rhode Island. The worst cost burdens among the 50 metros measured in Zillow's analysis are all in California, though. The highest cost burden of both child care and a mortgage is in Los Angeles. The typical household with a home and those two toddlers can expect to pay 121 percent of their income to afford both. That leaves nothing for any other expenses, Sean. Yep. The math is not computing or whatever the youths say. The other metro areas in California with a high child care and mortgage burden include San Diego at 113 percent, San Jose at 109 percent, and San Francisco at 106 percent. And the most expensive child care alone is found in Knoxville, Tennessee, where parents typically pay about $3,400 per month, or 66% of their income,

for two toddlers. In Boston, parents also pay about $3,400 per month, but the typical income is higher, so child care comes out to about 39% of their income. There's clearly an affordability crisis for both child care and housing that's largely due to good old-fashioned limited supply and high demand. But there's a little more nuance than that for both. We'll get into that after a quick break. Ana, can you explain what's going on with childcare affordability? Sure, Sean.

Childcare is largely private and generally doesn't receive government subsidies. So profits for these businesses are pretty low. Even though childcare is expensive to parents, businesses still aren't making much money. A U.S. Treasury report in 2021 found most for-profit childcare facilities operate on less than 1% profit margin. That means childcare businesses are charging more to stay up and running. And even then, those businesses are less likely to survive. That creates more competition for the remaining child care centers, which also drives up prices. So you can understand why keeping those for-profit businesses open and affordable is a challenge.

Nonprofit child care organizations receive some government subsidies that keep prices a little bit lower. But these organizations only provide about one-third of the nation's child care services. So given that some parents would have to pay more than 100% of their income to cover a mortgage and child care, I imagine this forces parents to make some really tough decisions. That's right, Sean. The cost of child care for parents is so high, they often have to choose between working and sending their children for childcare. And as we know, that burden often falls on mothers. It's part of the reason why

female labor force participation rates have stayed pretty much flat since 2000. When women are out of the workforce for longer, it can also limit their lifetime earnings. So there are a lot of effects on families from having often prohibitively expensive child care. The current system isn't working for businesses or for people. That's a helpful, if discouraging, overview of the cost of child care, Anna.

But it doesn't tell the whole story. To fill in the blanks about why mortgages are so unaffordable, we're talking with NerdWallet writer and mortgage expert Kate Wood. Kate, welcome back to Smart Money. Thanks so much for having me. Kate, can you tell us what has been going on with the housing market over the last few years and how is it making home buying so expensive?

There is a lot going on. And as you mentioned, it's supply and demand, but there are a few added twists. So we have tons of demand with millennials and now Gen Z hitting prime home buying age. And there are also demographic shifts brought on by the pandemic, like people being able to move out of cities due to remote work. On the supply side, you've got a lack of inventory. That was already going on. New construction had lagged for years before the pandemic, but that has become even more difficult.

And I recall those early days of the pandemic when the Federal Reserve cut a key interest rate to nearly zero, bought up tons of mortgage-backed securities, and mortgage interest rates hit a record low. Can you remind us of how that impacted the market? So that was a wild time. Those changes allowed mortgage lenders to cut mortgage interest rates to near record lows, and that created a booming market, both of new buyers coming in and of existing homeowners refinancing their mortgages. So combining all of that demand with limited supply, we've pretty much got your econ 101 recipe for high prices and home prices indeed went up astronomically in 2021 and 2022. It's an amazing time to be a homeowner, but it is not the best if you are a home buyer. All right. So what are we seeing now in 2024? Well, now going from 2023 into 2024, we're adding higher mortgage interest rates to the mix because the Federal Reserve has had to shift gears and has gone into a lengthy cycle of rate hikes,

followed by now this period we're in of holding interest rates stable. So now that mortgage rates are, you know, double or more those historic lows we saw a couple of years ago, it is much costlier for buyers looking to get into the market because they're looking at paying more in interest on homes that are higher priced. This is also a disincentive for homeowners who might consider selling if they weren't giving up those ultra low rates. Not to mention that when they sell their homes, they become home buyers as well, and they face that same challenging market when they're looking to buy that next home. Yep. My partner and I joke that our starter homes are also our forever homes because we don't want to give up our low interest rates and houses are just so much more expensive now. So that would be hard to afford for us. So Kate, where are some of the most pricey housing markets right now? Well, they are pretty similar to what you all were talking about with the most expensive cities for servicing a mortgage and getting child care.

So looking at data from Realtor.com that covers the last quarter of 2024, price wise, the most costly metros are in California. San Jose, Los Angeles and San Francisco all had average list prices that were north of $1 million. And San Diego was only about $10,000 under that. The next priciest was Boston, which is more around $800,000. It's still extremely expensive, but it's not quite in that stratosphere. So Kate, what's happening here? Can you explain what's going on in some of the most costly metros? Really, it's the same things that are happening everywhere, kind of just to different degrees, right? Tremendous demand, very limited supply. San Jose, for example, the average list price actually dropped year over year. But because it is so absurdly high,

that dip isn't going to make much of a difference for buyers. So what happens when housing becomes too expensive for people? I assume they're making trade-offs in other areas of their lives. That is definitely happening. Across the board, we're seeing people getting more creative with their living situations. That's buying with a partner, whether platonic or romantic, a lot of multi-generational households, other types of shared housing situations. Again, folks that are no longer tied down to a certain location for work aren't beholden to cities. Maybe they can move to places that are a little bit less costly to live. And another thing that we've seen a lot is that there is more acknowledgement that buying a home isn't a necessary milestone. Depending on your goals and where you want to live, renting might make more sense. All right. So what's the outlook for the

coming year, Kate? Are mortgages going to come down at all? Well, the outlook for mortgage interest rates is pretty decent if you take a slightly long point of view. There was a lot of hope that the Federal Reserve, which sets interest rates at a high level, right? There's a lot of hope that they were going to move into rate cutting mode, possibly as soon as March. Now it looks like that could maybe be June, right?

May, if we are extremely lucky in that regard. Industry predictions do have mortgage rates falling by the end of the year, but not dramatically. So right now, 30-year rates are in the high 6% range, and we can anticipate them dropping maybe down to like the high 5%. But our advice at NerdWallet is always, always, always don't pin your hopes on mortgage rate predictions. Markets are neither cyclical nor rational. So really focus on when it is the right time for you to buy. If you're waiting for rates to hit a certain number, who knows how long you'll wait or what you might miss out on in the meantime. So do you have any advice for prospective homebuyers right now,

especially those struggling with high childcare costs? Buying a home is a pricey proposition. There's really no way around that. So it's really important to arm yourself with information so that you don't make it costlier than it has to be. A big one, down payment requirements vary by mortgage types and there is not a type of mortgage that requires a 20% down payment. So if you are thinking, oh, you know,

I need to save 20% in order to afford this house, you simply don't need to do it. The Zillow data is using a 10% down payment figure and for a first-time buyer, that is high. Another big one, look into first-time homebuyer programs in your area. These exist in every state, and depending on where you live, they might be available at the city or county level as well. These programs can provide assistance with your down payment costs in the form of low-interest loans, deferred loans, or even grants. So that's free money to help you buy a home. Thanks for that, Kate. And back over to child care. Anna, what can parents do about the high

costs? A few things. First off, child care costs can vary, but so can the quality of care. So parents need to do some comparison shopping with a few different factors in mind, and price can be one of those. Parents can also consider a dependent care flexible spending account in which parents can deposit up to $5,000 pre-tax into an account once a year, and they must use the money on childcare costs by the end of the year. You can find out more about that at fsafeds.com.

Parents should also take advantage of the child tax credit if they qualify. The tax credit can cover a percentage of childcare costs. So for 2023, taxpayers may be eligible for a credit up to $2,000 and $1,600 of that may be refundable. Otherwise, the it takes a village approach can help keep some babysitting costs low. A babysitting co-op, for example,

is an arrangement where a set of families exchange care for each other without any money changing hands. Well, Ana, Kate, thanks for the breakdown. You got it. Oh, thank you for having me. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us with your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdball.com. And remember to follow, rate, and review us wherever you get your podcasts. Today's episode

was produced by Sean and I and edited by Amanda Derengowski and Mary Makarushka. Sarah Brink mixed our audio. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next

time, turn to the nerds.