“Typical Mortgage Payment” U.S. Homebuyers Face Continues To Fall Below Year-Ago Level

Many Buyers This Year Have Seen Modest Gains in Affordability Amid Lower Mortgage Rates, Smaller Home-Price Increases and Modest Income Gains

By Andrew LePage Housing Affordability, Real Estate

Falling mortgage rates and slower home-price growth mean that in many cases this year’s buyers are committing to lower mortgage payments than they would have faced for the same home last year. After rising at a double-digit annual pace last year, the principal-and-interest payment on the nation’s median-priced home – what we call the “typical mortgage payment”[1] – fell on a year-over-year basis for the second consecutive month this May.

While the U.S. median sale price in May 2019 – $232,560 – was up 3.4% year over year, the typical mortgage payment fell 2.9% because of a roughly 0.5-percentage-point annual decline in mortgage rates. In May last year the median sale price was up 7% year over year and the typical mortgage payment was up 15% because of a 0.6-percentage-point annual gain in mortgage rates.

Looking ahead, the CoreLogic Home Price Index (HPI) and HPI Forecast suggest annual gains in home prices each month from June 2019 through May 2020 will average 4.6%. However, that forecast, combined with the average among six mortgage rate forecasts[2], suggests that over that same 12-month period the annual change in the typical mortgage payment each month will average out to a decline of 3.3%. For the last seven months of this year the forecasts suggest the declines will average 5.9%. The trend is driven by the expectation that, on average, the rate on a 30-year fixed-rate mortgage during the June 2019-through-May 2020 period will be almost 0.7 percentage points lower than during the year-earlier period.

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 1 shows that while the real, meaning inflation-adjusted[3], typical mortgage payment has trended higher in recent years, in May 2019 it remained 30.3% below the all-time peak of $1,286 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 May 2019 (Figure 2), and the real U.S. median sale price in June 2006 was $249,086 (or $197,000 in 2006 dollars), compared with a May 2019 median of $232,560.

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

In addition to the typical mortgage payment’s decline over the past year, many homebuyers are better off this year because of at least modest annual income gains. Increases in real personal disposable income averaged about 3.3% during the first two quarters of this year, according to IHS Markit.

[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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