"Typical Mortgage Payment" U.S. Homebuyers Committed to in 2019 Dropped from Prior Year

Affordability Has Improved for Many Buyers Thanks to Lower Mortgage Rates and Smaller Home-Price Increases

By Arthur Jobe Housing Affordability, Real Estate

Falling mortgage rates and slower home-price growth meant that many buyers in 2019 committed to lower mortgage payments than they would have faced for the same home the year before. After rising at a double-digit annual pace in 2018, the principal-and-interest payment on the nation’s median-priced home – what we call the “typical mortgage payment”[1] – fell year over year again in December 2019 for the 8th consecutive month.

While the U.S. median sale price in December 2019 – $225,723 – was up 4.0% year over year, the typical mortgage payment fell 6.8% because of a 20% decline in fixed mortgage rates, from 4.64% in December 2018 to 3.72% in December 2019. By comparison, median sale price in December 2018 was up by 3.8%, and the typical mortgage payment spiked by 12.7% due to a 0.7 percentage point annual gain in mortgage rates.

Looking ahead, the CoreLogic Home Price Index (HPI) and HPI Forecast suggest that annual gains in home prices each month from January 2020 through December 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 an increase of just 2.7%.  The trend is driven by the expectation that, on average, the rate on a 30-year fixed-rate mortgage during the January 2020-through-December 2020 period will be about 0.2 percentage points lower than a year earlier.

Figure 1: 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 December 2019 it remained 35.8% below the all-time high of $1,298 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 3.7% in December 2019 (Figure 2), and the real U.S. median sale price in June 2006 was $251,922 (or $197,000 in 2006 dollars), compared with a December 2019 median of $225,723.

 Figure 2: "Typical Mortgage Payment" Homebuyers Face Trended Below Year-Ago Level in 2019

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[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.