Home Price and Mortgage Rate Forecasts Suggest Smaller Gains in the Mortgage Payments Homebuyers Will Face This Year

Annual Gain in “Typical Mortgage Payment” Last December Fell Six Percentage Points Compared With Prior Month, When Rates Hit Seven-Year High

By Andrew LePage Housing Affordability, Real Estate

While the nation’s median home sale price rose about 4 percent year over year in December 2018, the principal-and-interest mortgage payment on that median-priced home increased nearly three times as much because mortgage rates rose by more than half a percentage point over that period. However, some forecasts for home prices and mortgage rates indicate mortgage payments will rise at a much slower pace this year, which could help stoke home sales this spring.  

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 December 2018 – $220,305 – was up 4.4 percent year over year, while the typical mortgage payment was up 12.1 percent because of a 0.6-percentage-point rise in mortgage rates over that one-year period. That 12.1 percent gain in the typical payment was down from a 17.8 percent increase in November 2018, when mortgage rates hit a seven-year high.  

Looking ahead, the CoreLogic Home Price Index Forecast suggests a 4.5 percent annual gain in home prices by this December, while the average among six rate forecasts[1] indicates a small increase – 0.1 percentage points – in mortgage rates this December compared with December 2018.  

Rate and Price Forecasts

The CoreLogic HPI Forecast suggests the median sale price will rise 2.1 percent in real, or inflation-adjusted, terms over the year ending December 2019 (or 4.5 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 $904 in December 2018 to $935 by December 2019, a 3.5 percent year-over-year gain (Figure 1), down from a 9.9 percent gain a year earlier. In nominal terms the typical mortgage payment’s year-over-year increase in December 2019 would be 6.0 percent, or about half the 12.1 percent gain a year earlier.  

If forecasts for prices, rates and income hold, homebuyers will lose less purchasing power this year compared with 2018. An IHS Market forecast indicates a roughly 2.1 percent annual rise in real disposable income this December, while the rate and price forecasts suggest the real typical mortgage payment will rise 3.5 percent. The annual gain in real disposable income last December was about 3.3 percent while the real typical mortgage payment was up 9.9 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 December 2018 it remained 29.2 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 4.6 percent in December 2018, and the real U.S. median sale price in June 2006 was $247,075 (or $197,100 in 2006 dollars), compared with a December 2018 median of $220,305.

[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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