“Typical Mortgage Payment” Homebuyers Commit to Has Dipped Below a Year Ago in Some Large U.S. Metro Areas

In Real Terms, Homebuyers’ Monthly Principal-and-Interest Payments Fell Year Over Year in Six of the Top 10 Metro Areas this March

By Andrew LePage Housing Affordability, Real Estate

Homebuyers in some markets are finally benefiting from a bit of a tailwind. Slower home-price growth and this year’s sharp drop in mortgage rates, which hit a seven-year high last November, mean some homebuyers face monthly mortgage payments that are close to or down modestly from a year ago.

The monthly principal-and-interest payment on the median-priced home – what we call the “typical mortgage payment”[1] – fell at least slightly year over year in four of the nation’s 10 largest metropolitan areas this March. Nationally that payment rose 1.9% – down from a nearly 11% annual gain in March 2018 and the lowest such increase in 30 months.

Real "Typical Mortgage Payment" Fell Year Over Year in Six of Top 10 U.S. Metros Areas in Mar-19

Adjusting the historical typical mortgage payments for inflation[2] – meaning they are in 2019 dollars – shows the typical mortgage payment in March fell modestly year over year in six of the top 10 markets (Figure 1). The annual declines ranged from 0.9% in Los Angeles to 5.4% in Boston, while real payments in the remaining four metros rose between 2% in New York and 3.9% in Houston. Nationally the inflation-adjusted, or “real,” typical mortgage payment in March was unchanged from a year earlier.

Typical Mortgage Payment Has Risen More Sharply in West

As recently as January this year none of the top 10 metros showed an annual decline in their real typical mortgage payments and nationally the annual gain this January was 9.5%. In March last year the real typical mortgage payment was up 8.1% year over year.

In recent years the nation’s typical mortgage payment was driven up sharply by both rising home prices and mortgage rates, which climbed last year to a November peak of 4.9% for a fixed-rate 30-year loan, according to Freddie Mac. By this March that average rate had dropped to 4.3% and it has fallen farther since then.

Real Typical Mortgage Payment Still Lower than '06 & '07

While the real typical mortgage payment trended higher in all of the top 10 metros over the past few years (Figure 2), in eight of the metros the payment has remained below peak levels reached in 2006 and 2007 (Figure 3). Real payments in Denver and San Francisco peaked in mid-2018 and this March the payments in both were 7% to 8% below those peaks.

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%, compared with an average mortgage rate of about 4.3% this March. Also, the real U.S. median sale price in June 2006 was $248,066 (or $197,100 in 2006 dollars), compared with $222,482 in March 2018.

Five of Top 10 Metros' Typical Mortgage Payments Higher Than in '02 (Before Worst of Pre-Bust Risky Financing)

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 March 2019 that were higher than in March 2002 (Figure 4), meaning affordability is worse now.

[1] 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% 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.

[2] Inflation adjustments made with the U.S. Bureau of Labor Statistics Consumer Price Index (CPI), Urban Consumer – All Items.

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