After a Spike in 2018, Smaller Gains Ahead for Mortgage Payments Homebuyers Face, Forecasts Suggest

In November, Before Mortgage Rates Fell, Annual Gain in Homebuyers’ “Typical Mortgage Payment” was Triple that of Prices

By Andrew LePage Housing Affordability, Real Estate

While the nation’s median home sale price rose just under 5 percent year over year last November, the principal-and-interest mortgage payment on that median-priced shot up nearly 18 percent as mortgage rates hit a seven-year high. That underscores the worsening affordability that helped slow home sales late last year.

However, some forecasts for home prices and mortgage rates indicate mortgage payments will rise at a much slower pace this year. The CoreLogic Home Price Index Forecast suggests a 4.4 percent annual gain in home prices by this November, while the average among six rate forecasts[1] indicates a very slight dip – 0.1 percentage points – in mortgage rates this November compared with November 2018. However, that consensus rate forecast, which indicates a 4.8 percent rate on a fixed-rate 30-year mortgage this November, would still be higher than the average rates seen last December (4.6 percent) and this January (4.5 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 November 2018 – $220,083 – was up 4.8 percent year over year, while the typical mortgage payment was up 17.9 percent because of a one-percentage-point rise in mortgage rates over that one-year period.

Rate and Price Forecasts

The CoreLogic HPI Forecast suggests the median sale price will rise 2.2 percent in real, or inflation-adjusted, terms over the year ending November 2019 (or 4.4 percent in nominal, or not-inflation-adjusted, terms). Based on that projection, coupled with the aforementioned consensus mortgage rate forecast, the real typical monthly mortgage payment would rise from $934 in November 2018 to $943 by November 2019, a 0.9 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year increase in November 2019 would be 3.1 percent.

If forecasts for prices, rates and income hold, homebuyers stand to gain purchasing power this year. An IHS Market forecast indicates a 2 percent annual rise in real disposable income this November, while the rate and price forecasts put the real typical mortgage payment up 0.9 percent.

Low Rates

When adjusted for inflation[2] the typical mortgage payment puts homebuyers’ current costs in the proper historical context. Figure 2 shows that while the real typical mortgage payment has trended higher in recent years, in November 2018 it remained 26.7 percent below the all-time peak of $1,275 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 4.9 percent in November 2018, and the real U.S. median sale price in June 2006 was $246,998 (or $197,200 in 2006 dollars), compared with a November 2018 median of $220,038.

[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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