Nationwide “Typical Mortgage Payment” Homebuyers Commit To Drops Year Over Year

Helping to Stoke Demand, Recent Decline in Mortgage Rates and Weaker Price Growth Mean Payments for Some Buyers Are Lower Than A Year Ago

By Andrew LePage Housing Affordability, Real Estate

Last year rising mortgage rates meant the monthly payments that many homebuyers struggled to qualify for were rising much faster than home prices. The most extreme example is November 2018, when the U.S. median sale price was up 4% year over year but the principal-and-interest payment on that median-priced home – what we call the “typical mortgage payment”[1] – was up 17% because mortgage rates had shot up a percentage point from a year earlier.

By April this year, however, five months of declining mortgage rates had resulted in a 1.0% year-over-year drop in the typical mortgage payment despite a 3.3% gain in the median sale price. Moreover, some rate and price forecasts suggest the mortgage payments many homebuyers will face the rest of this year will be lower than a year earlier, helping to spur sales.

The U.S. median sale price in April 2019 was $227,238, up 3.3% year over year. That’s down from the median’s annual gain of 7.3% in April last year. The typical mortgage payment fell 1.0% year over year this April because of a roughly 0.4-percentage-point annual decline in mortgage rates. In April 2018 the typical mortgage payment was up 9.9% year over year because of a 0.4-percentage-point annual gain in mortgage rates.

"Typical Mortgage Payment" Homebuyers Face Is Trending Below Year-Ago Level in 2019

Looking ahead, the CoreLogic Home Price Index (HPI) and HPI Forecast suggest annual gains in home prices each month from May 2018 through next April will average 5.2%. However, that forecast, combined with the average among six mortgage rate forecasts[2], suggests that over that same period the annual change in the typical mortgage payment each month will average out to a decline of 1.6%, including annual declines averaging 3.6% during the last eight months of this year (Figure 1).

The CoreLogic HPI Forecast suggests the median sale price will rise 3.1% in real, or inflation-adjusted[3], terms over the year ending April 2020 (or 5.7% 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 $883 in April 2019 to $901 by April 2020, a 2.1% year-over-year gain. In nominal terms the typical mortgage payment’s year-over-year increase in April 2020 would be 4.8%.  

Lower Rates Have Kept "Typical Mortgage Payment" Below '06 Peak

When adjusted for inflation 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 April 2019 it remained 31.3% below the all-time peak of $1,285 in June 2006. That’s because the average mortgage rate back in June 2006 was about 6.7%, compared with an average rate of about 4.1% in April 2019, and the real U.S. median sale price in June 2006 was $248,894 (or $197,000 in 2006 dollars), compared with an April 2019 median of $227,238.

[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] 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. 

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

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