“Typical Mortgage Payment” U.S. Homebuyers Commit to Outpacing Prices

Mortgage Rate Forecasts Suggest a Nearly 12 Percent Annual Rise in Buyers’ Mortgage Payments by Next Spring – Twice the Expected Gain for Home Prices

By Andrew LePage Housing Affordability, Real Estate

While the U.S. median sale price has risen by just under 7 percent over the past year the principal-and-interest mortgage payment on that median-priced home has increased nearly 10 percent. Moreover, the CoreLogic Home Price Index Forecast suggests U.S. home prices will be up 5.8 percent year-over-year in March 2019, while some mortgage rate forecasts suggest the mortgage payments homebuyers face will rise twice that much.

Mortgage Rates vs Year Over Year Change in Real Median Sale Price & Typical Mortgage Payment

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 0.46 percentage points, or 46 “basis points,” between March 2018 and March 2019. The CoreLogic HPI Forecast suggests the median sale price will rise 3.9 percent in real terms over that same period (or 5.8 percent in nominal terms). Based on these projections, the inflation-adjusted typical monthly mortgage payment would rise from $859 in March 2018 to $942 by March 2019, a 9.7 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year gain would be 11.7 percent.

National Homebuyers Typical Mortgage Payment

An IHS Markit forecast calls for real disposable income to rise by just over 3 percent over the next year, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.

When adjusted for inflation[2] 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 March 2018 it remained 32.5 percent below the all-time peak of $1,273 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 about 4.4 percent in March 2018, and the inflation-adjusted U.S. median sale price in June 2006 was $247,110 (or $199,899 in 2006 dollars), compared with a March 2018 median of $213,400.

[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.

[2] Inflation adjustments made with the U.S. Bureau of Labor Statistics Consumer Price Index (CPI), Urban Consumer – All Items.

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