Homebuyers’ “Typical Mortgage Payment” Rising Much Faster Than Home Prices

Mortgage Rate Forecasts Call for Higher Rates and Suggest an 11-Plus Percent Jump in Buyers’ Mortgage Payments by Next August

By Andrew LePage Housing Affordability, Real Estate

While the U.S. median sale price has risen by just under 6 percent over the past year, the principal-and-interest mortgage payment on the median-priced home has increased nearly 15 percent. Moreover, while the CoreLogic Home Price Index Forecast suggests U.S. home prices will rise 4.7 percent year over year in August 2019, some mortgage rate forecasts indicate the mortgage payments homebuyers will face by then will have risen by more than 11 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 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 August 2018 – $226,155 – was up 5.7 year over year, while the typical mortgage payment was up 14.5 percent because of a nearly 0.7-percentage-point rise in mortgage rates over that one-year period.

A consensus forecast[1] suggests mortgage rates will rise by about 0.5 percentage points between August 2018 and August 2019. The CoreLogic HPI Forecast suggests the median sale price will rise 1.9 percent in real, or inflation-adjust, terms over that same period (or 4.7 percent in nominal terms). Based on these projections, the real typical monthly mortgage payment would rise from $922 in August 2018 to $1,000 by August 2019, an 8.4 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year gain would be 11.4 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 Typical Mortgage Payment

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 August 2018 it remained 28.1 percent below the all-time peak of $1,283 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 4.6 percent in August 2018, and the inflation-adjusted U.S. median sale price in June 2006 was $248,980 (or $199,500 in 2006 dollars), compared with an August 2018 median of $226,155.

[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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