Monthly Mortgage Payments Homebuyers Face Likely to Rise at Much Slower Pace This Year, Rate and Home Price Forecasts Suggest

Annual Gain in “Typical Mortgage Payment” this January Fell Seven Percentage Points From Last November, 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 January 2019, the principal-and-interest mortgage payment on that median-priced home increased almost 11 percent because mortgage rates rose by half a percentage point over that period. However, rates continued to ease after January this year and some mortgage rate and home price forecasts suggest payments will rise at a much slower pace through 2019, which would help fuel sales.   

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, which vary geographically. The typical mortgage payment is a good gauge of affordability over time because, when adjusted for inflation, it shows the monthly principal and interest amount homebuyers have committed to historically in order to buy the median priced U.S. home.

The U.S. median sale price in January 2019 – $212,344 – was up 4.1 percent year over year, while the typical mortgage payment was up 10.5 percent because of a 0.5-percentage-point rise in mortgage rates over that one-year period. That 10.5 percent annual 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 5.2 percent annual gain in home prices by January next year, while the average among six rate forecasts[1] indicates a small increase – roughly 0.1 percentage points – in mortgage rates next January compared with January 2019.  

Lower Gains Ahead for Homebuyers Mortgage Payments

The CoreLogic HPI Forecast suggests the median sale price will rise 2.5 percent in real, or inflation-adjusted, terms over the year ending January 2020 (or 5.2 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 $861 in January 2019 to $889 by January 2020, a 3.3 percent year-over-year gain (Figure 1), down from an 8.8 percent gain a year earlier. In nominal terms the typical mortgage payment’s year-over-year increase in January 2020 would be 5.9 percent, or just over half of the 10.5 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 2.2 percent annual rise in real disposable income next January, while the rate and price forecasts suggest the real typical mortgage payment will rise 3.3 percent. The annual gain in real disposable income in January this year was about 2.7 percent while the real typical mortgage payment was up 8.8 percent.

Lower Rates Have Kept 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 real typical mortgage payment has trended higher in recent years, in January 2019 it remained 32.5 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 4.5 percent in January 2019, and the real U.S. median sale price in June 2006 was $246,976 (or $197,000 in 2006 dollars), compared with a January 2019 median of $212,344).

[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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