Inflation-Adjusted “Typical Mortgage Payment” Buyers Face is Up Sharply but Still Below Pre-Crisis Peak in Eight of Top 10 US Metro Areas

Payments in the Denver and San Francisco Metro Areas Have Hit Record Levels this Year

By Andrew LePage Housing Affordability, Real Estate

The median home sale price has climbed to record levels this year in half of the nation’s 10 largest metro areas[1] and has come within 7 percent of an all-time high in four of the remaining metros – a sign of waning affordability. But in eight of those markets the inflation-adjusted, principal-and-interest mortgage payments that homebuyers committed to this June were still  below peak levels from 2006 and 2007. However, in half of the 10 markets payments have risen above levels in 2002, just prior to the explosion in risky financing that enabled prices to reach those 2006-2007 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.

Change in the Real Typical Mortgage PaymentIn nominal terms, meaning not adjusted for inflation, the year-over-year increase in the typical mortgage payment for the top 10 metro areas in June ranged from 9.2 percent in New York to 22.5 percent in the Las Vegas region – gains likely well beyond the typical buyer’s income growth for that period. Nationally the nominal typical mortgage payment in June increased 15.1 percent year over year.    

Adjusting the historical typical mortgage payments for inflation[2]– meaning they are in 2018 dollars – shows that while the payments have trended higher in all of the top 10 metros over the last three years (Figure 1) they remained below peak levels this June in all but Denver (Figure 2). The inflation-adjusted, or “real,” typical mortgage payment in the San Francisco area in June was slightly below the record high it hit this May. 

Top 10 Metros Jun 18 Real Typical MortgageThe 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 4.6 percent this June. Also, the real U.S. median sale price in June 2006 was $248,312 (or $199,750 in 2006 dollars), compared with $233,732 in June 2018. The real typical mortgage payments in the Denver and San Francisco regions have risen to all-time highs this year because those regions’ prices have hit new highs, reflecting strong technology sector job growth that has helped fuel robust housing demand at a time supply has not kept pace.

Top 10 Metros June 18 Real Typical MortgageThe nationwide 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. That created 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 – led by San Francisco, Los Angeles and Miami – had real typical mortgage payments in June 2018 that were higher than in June 2002 (Figure 3), meaning affordability is worse now.

[1] 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

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

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