Of the nation’s 10 largest metro areas all but two have posted median home sale prices this year that are within about 10 percent of an all-time high – a sign of waning affordability. But in most of those markets the inflation-adjusted, principal-and-interest mortgage payments that homebuyers have committed to this year remain much lower than their pre-crisis peaks.
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 median home sale price (see recent blog on the U.S. typical mtg payment). 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 home.
Adjusting the historical typical mortgage payments for inflation – meaning they are in 2018 dollars – shows that while the payments have trended higher in all of the top 10 metros in recent years (Figure 1) they remained below peak levels this March in all but the Denver and San Francisco areas (Figure 2). The main reason the typical mortgage payment remains well below record levels in most of the country is that the average mortgage rate back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7 percent, compared with an average mortgage rate of about 4.4 percent in March 2018. Also, the inflation-adjusted U.S. median sale price in June 2006 was $247,110 (or $199,899 in 2006 dollars), compared with $213,400 in March 2018. The March 2018 typical mortgage payments in the Denver and San Francisco regions have risen to record levels because those regions’ prices hit new highs this spring, reflecting strong technology sector job growth that has helped fuel robust housing demand at a time supply has not kept pace.
The U.S. typical mortgage payment’s high point in 2006 reflects an abundance of subprime and other risky home financing products back then – products no longer widely available – that allowed homebuyers to stretch to their financial max, creating what some people consider an artificial price peak. An alternative reference point for comparing today’s typical mortgage payments is 2002, before the worst of the risky loans inflated an historic home price bubble. Half of the top 10 metro areas had inflation-adjusted typical mortgage payments in March 2018 that were higher than in March 2002 (Figure 3), meaning affordability is worse now.
 The top 10 U.S. metro areas by population: Boston MA Metropolitan Division; Chicago-Naperville-Arlington Heights IL Metropolitan Division; Denver-Aurora-Lakewood CO Metropolitan Statistical Area; Houston-The Woodlands-Sugar Land TX Metropolitan Statistical Area; Las Vegas-Henderson-Paradise NV Metropolitan Statistical Area; Los Angeles-Long Beach-Glendale CA Metropolitan Division; Miami-Miami Beach-Kendall FL Metropolitan Division; New York-Jersey City-White Plains NY-NJ Metropolitan Division; San Francisco-Redwood City-South San Francisco CA Metropolitan Division; Washington-Arlington-Alexandria DC-VA-MD-WV Metropolitan Division
 Inflation adjustments made with the U.S. Bureau of Labor Statistics Consumer Price Index (CPI), Urban Consumer – All Items.
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