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Homebuyers’ “Typical Mortgage Payment” Up 10 Percent Year Over Year

Forecasts Suggest the Payment Could Rise 11 Percent Over the Next Year

Andrew LePage    |    Housing Trends

While home prices have risen about 6 percent over the past year, the mortgage payments that recent homebuyers have committed to have risen closer to 10 percent because of the increase in mortgage rates over the past year.

One way to measure the impact of inflation, mortgage rates and home prices on affordability over time is to use something we call the “typical mortgage payment.” It’s a mortgage-rate-adjusted monthly payment based on each month’s U.S. median home sale price. It is calculated using Freddie Mac’s average rate on a 30-year fixed-rate mortgage with a 20 percent down payment. It does not include taxes or insurance. The typical mortgage payment is a good proxy for affordability because it shows the monthly amount that a borrower would have to qualify for in order to get a mortgage to buy the median-priced U.S. home. When adjusted for inflation, the typical mortgage payment also puts current payments in the proper historical context.

The change in the typical mortgage payment over the past year illustrates how it can be misleading to simply focus on the rise in home prices when assessing affordability. For example, in August this year the median sale price was up 6.3 percent from a year earlier in nominal terms, but the typical mortgage payment was up 10.1 percent because mortgage rates had increased nearly 0.5 percentage points over that 12-month period.

Figure 1 shows that while the inflation-adjusted typical mortgage payment has trended higher in recent years, in August 2017 it remained 34.7 percent below the all-time high payment of $1,250 in June 2006. That’s because the average mortgage rate back in June 2006 was about 6.7 percent, compared with 3.9 percent this August, and the inflation-adjusted median sale price in June 2006 was $242,723 (or $199,900 in 2006 dollars), compared with a median of $216,811 in August 2017.

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Forecasts from IHS Markit call for inflation and income to rise gradually over the next year, while a consensus forecast[1] suggests mortgage rates will gradually ratchet up about 70 basis points between August 2017 and August 2018. The CoreLogic Home Price Index forecast suggests the median sale price will rise about 3.0 percent in real terms over the same period. Based on these projections, the inflation-adjusted typical mortgage payment would rise from $816 this August to $908 by August 2018, an 11.3 percent year-over-year gain (Figure 2). Real disposable income is projected to rise about 3.6 percent over the same period, meaning next year’s homebuyers would see a larger chunk of their incomes devoted to mortgage payments.

[1] Based on the average mortgage rate forecast from Freddie Mac, Fannie Mae, Mortgage Bankers Association, National Association of Realtors, National Association of Home Builders and IHS Markit. 

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