“Typical Mortgage Payment” Homebuyers Face is Far Outpacing Rise in Home Prices

Mortgage Rate Forecasts Indicate an 11 Percent Jump in Buyers’ Mortgage Payments by Next September

By Andrew LePage Housing Affordability, Real Estate

While the median price paid for a home nationally has risen by less than 6 percent over the past year, the principal-and-interest mortgage payment on the median-priced home has increased by more than 16 percent. Moreover, while the CoreLogic Home Price Index Forecast suggests U.S. home prices will have risen by almost 5 percent year over year in September 2019, some mortgage rate forecasts indicate the mortgage payments homebuyers will face at that point 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.

The U.S. median sale price in September 2018 – $221,697 – was up 5.6 year over year, while the typical mortgage payment was up 16.4 percent because of a 0.8-percentage-point rise in mortgage rates over that one-year period.

Mortgage Rates vs. Year Over Year

A consensus forecast[1] suggests mortgage rates will rise by about half of a percentage point between September 2018 and September 2019. The CoreLogic HPI Forecast suggests the median sale price will rise 2.7 percent in real, or inflation-adjusted, terms over that same period (or 4.9 percent in nominal terms). Based on these projections, the real typical monthly mortgage payment would rise from $912 in September 2018 to $994 by September 2019, an 8.9 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year gain in September 2019 would be 11.3 percent.

An IHS Markit forecast indicates that real disposable income will rise by around 2.6 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 September 2018 it remained 28.8 percent below the all-time peak of $1,281 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 4.6 percent in September 2018, and the inflation-adjusted U.S. median sale price in June 2006 was $248,717 (or $199,000 in 2006 dollars), compared with a September 2018 median of $221,697.

[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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