Welcome to NerdWallet's Smart Money podcast. I'm Sean Piles.

And I'm Anna Hielhausky.

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 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 childcare 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 childcare budgets recommend that housing should cost no more than 30% of a family's monthly income, while childcare 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 childcare and a mortgage is in Los Angeles. The typical household with a home and those two toddlers can expect to pay 121% of their income to afford both.

That leads 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 childcare and mortgage burden include San Diego at 113%, San Jose at 109%, and San Francisco at 106%.

The most expensive childcare 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 to pay about $3,400 per month, but the typical income is higher, so childcare comes out to about 39% of their income.

There's clearly an affordability crisis for both childcare 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.

This episode is brought to you by Betterhelp. There's never a a perfect time to improve your mental health, so you might as well start doing it now. And services like Betterhelp make accessing therapy easy. Whether you're looking to improve your coping skills, need help processing a hard time in life, or just want someone to to walk with, therapy can help. And if you haven't been to therapy before or think it's not right for you, you might actually be a great candidate for it. Think of therapy like getting a tune up on your car. Even if nothing needs an immediate fix, therapy Therapy can give you a baseline understanding of how you feel when things are good so you can gage when you might need help later on. So if you're thinking of starting therapy, give better help a try. It's entirely online, designed to be convenient, flexible, and suited to your schedule. Just fill out a brief questionnaire to get matched with a licensed therapist and switch therapists at any time for no additional charge. So get in the driver's seat of your mental health. Visit betterhelp. Com/smartmoney today to get 10% off your first month.

That's betterhelp, H-E-L-P. Com/smartmoney.

Anna, 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 US 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. Even then, those businesses are less likely to survive. That creates more competition for the remaining childcare centers, which also drives up prices. You can understand why keeping those to profit businesses open and affordable is a challenge. Nonprofit childcare organizations receive some government subsidies that keep prices a little bit lower, but these organizations only provide about one-third of the nation's childcare services.

Given that some parents would have to pay more than 100% of their income to cover a mortgage and childcare, I imagine this forces parents to make some really tough decisions.

That's right, Sean. The cost of childcare for parents is so high. They often have to choose between working and sending their children for childcare. 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. There are a lot of effects on families from having often prohibitively expensive childcare. The current system isn't working for businesses or for people.

That's a helpful, if discouraging overview of the cost of childcare, 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. As you mentioned, it's supply and demand, but there are a few added twists. We have tons of demand with millennials and now Gen Z in prime home buying age. 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.

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?

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. 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. Now that mortgage rates are 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.

Yeah. My partner and I joke that our starter Our homes are also our forever homes because we don't want to give up our low interest rates. 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 childcare. 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, just to different degrees. 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 location for work aren't beholden to cities. Maybe they can move to places that are a little bit less costly to live. 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, 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 the high 5%. But our advice at NerdWallet is always, always, always don't pin your hopes on of 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 home buyers 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. If you are thinking, Oh, 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 home buyer 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 childcare. Anna, what can parents do about the high costs?

A few things. First off, childcare costs can vary, but so can the quality of care. 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. 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, Anna, 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 9017-730-6373. That's 9017-730-N-E-R-D. Or send us a voice memo at podcast@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 Dierengausky and Mary Makaruszka. 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.