Rise in “Typical Mortgage Payment” Homebuyers Face This Year Could Far Outpace Price Gains

Forecasted Mortgage Rate Increases Translate Into Payments Rising About Three Times as Fast as Home Prices

By Andrew LePage Housing Affordability, Real Estate

The CoreLogic Home Price Index Forecast suggests U.S. home prices will rise by about 5 percent this year, but some mortgage rate forecasts mean the mortgage payments homebuyers face could increase closer to 16 percent.

One way to measure the impact of inflation, mortgage rates and home prices on affordability over time is to use what 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.

A consensus forecast [1] suggests mortgage rates will rise by about 0.82 percentage points, or 82 “basis points,” between December 2017 and December 2018. The CoreLogic HPI Forecast suggests the median sale price will rise 3.4 percent in real terms over the same period (or 5.1 percent in nominal terms). Based on these projections, the inflation-adjusted typical mortgage payment would rise from $800 in December 2017 to $911 by December 2018, a 13.9 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year gain would be 15.8 percent.

An IHS Markit forecast calls for real disposable income to rise by roughly 4 percent this year, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.

When adjusted for inflation the typical mortgage payment puts homebuyers’ current costs in the proper historical context. Figure 2 shows that while the inflation-adjusted typical mortgage payment has trended higher in recent years, in December 2017 it remained 36.8 percent below the all-time peak of $1,265 in June 2006. That’s because the average mortgage rate back in June 2006 was about 6.7 percent, compared with an average rate of just under 4 percent in December 2017, and the inflation-adjusted U.S. median sale price in June 2006 was $245,576 (or $199,900 in 2006 dollars), compared with a December 2017 median of $210,767.

[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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