Homebuyers’ “Typical Mortgage Payment” Rising At Twice the Rate of Prices

Mortgage Rate Forecasts Suggest a Nearly 10 Percent Gain in Buyers’ Mortgage Payments by Next July

By Andrew LePage Housing Affordability, Real Estate

While the U.S. median sale price has risen by close to 6 percent over the past year the principal-and-interest mortgage payment on that median-priced home has increased around 13 percent. Moreover, while the CoreLogic Home Price Index Forecast suggests U.S. home prices will be up 4.3 percent year over year in July 2019, some mortgage rate forecasts indicate the mortgage payments homebuyers will face then will have risen by more than twice as much.

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 to get a mortgage to buy the median-priced U.S. home.

Mortgage Rates vs Year Over Year

The U.S. median sale price in July 2018 – $230,411 – was up 5.8 year over year, while the typical mortgage payment rose 13.1 percent because of a nearly 0.6-percentage-point rise in mortgage rates over that one-year period.

A consensus forecast[1] suggests mortgage rates will rise by about 0.43 percentage points between July 2018 and July 2019. The CoreLogic HPI Forecast suggests the median sale price will rise 1.8 percent in real terms over that same period (or 4.3 percent in nominal terms). Based on these projections, the inflation-adjusted typical monthly mortgage payment would rise from $937 in July 2018 to $1,003 by July 2019, a 7.0 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year gain would be 9.7 percent.

An IHS Markit forecast calls for real disposable income to rise by around 2.5 percent over the next year, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.

National Homebuyers

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 July 2018 it remained 26.8 percent below the all-time peak of $1,280 in July 2006. That’s because the average mortgage rate back in June 2006 was about 6.7 percent, compared with an average rate of about 4.5 percent in July 2018, and the inflation-adjusted U.S. median sale price in June 2006 was $248,426 (or $199,500 in 2006 dollars), compared with a July 2018 median of $230,411.

[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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