The median price paid for a home climbed to record levels last year in six of the nation’s 10 largest metro areas – a sign of waning affordability. But in eight of those large markets the inflation-adjusted, or “real,” principal-and-interest mortgage payment on the median-priced home remained below levels reached at the peak of the last cycle in 2006 and 2007. The caveat, however, is that in half of the metros the real monthly payments were higher last December than in 2002, just prior to an explosion of risky financing that drove prices up to those bubbly highs in 2006 and 2007.
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 mortgage 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 to get a mortgage to buy the median-priced home.
In nominal terms, meaning not adjusted for inflation, the year-over-year increase in the typical mortgage payment for the top 10 metro areas in December 2018 ranged from 2.3 percent in New York to 11.3 percent in the Las Vegas region, while nationally the nominal typical mortgage payment last December increased 4.4 percent year over year.
Adjusting the historical typical mortgage payments for inflation – meaning they are in 2018 dollars – shows that while the payments have trended higher in all of the top 10 metros over the past few years (Figure 1) they remained below peak levels this December – peaks reached in 2006 and 2007 except in Denver and San Francisco (Figure 2), which peaked in mid-2018.
The main reason the real typical mortgage payment remains well below record levels in most of the country is that the average rate on a fixed-rate 30-year mortgage 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 last December. Also, the real U.S. median sale price in June 2006 was $247,075 (or $197,100 in 2006 dollars), compared with $220,305 in December 2018. The real typical mortgage payments in the Denver and San Francisco regions rose to all-time highs in mid-2018, reflecting, among other things, strong price growth as technology sector hiring drove housing demand in a market where supply hadn’t been keeping pace.
The 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 in 2006. An alternative reference point for comparing today’s typical mortgage payments is 2002, right before the worst of the risky loans inflated an historic home price bubble. Five of the top 10 metro areas – led by San Francisco and Los Angeles – had real typical mortgage payments in December 2018 that were higher than in December 2002 (Figure 3), meaning affordability is worse now.
 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.
 Inflation adjustments made with the U.S. Bureau of Labor Statistics Consumer Price Index (CPI), Urban Consumer – All Items.
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