“Typical Mortgage Payment” U.S. Homebuyers Committed to in February 2020 Dropped from Prior Year

Affordability Improved for Many Buyers for the 10th - Straight Month 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 February 2020 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 February 2020 for the 10th consecutive month.

While the U.S. median sale price in February 2020 – $223,502 – was up 4.0% year over year, the typical mortgage payment fell 6.8% because of a 21% decline in fixed mortgage rates, from 4.37% in February 2019 to 3.47% in February 2020. By comparison, median sale price in February 2019 was up by 3.6%, and the typical mortgage payment increased by 4.1% due to a 0.04 percentage point annual gain in mortgage rates.

Looking ahead, the CoreLogic Home Price Index (HPI) and HPI Forecast suggest that annual gains in sale prices each month from March 2020 through February 2021 will average 3.7%, with year-over-year change in HPI slowing significantly during that time . However, that forecast, combined with the average five 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 decrease of 2.8%.  The trend is driven by the expectation that, on average, the rate on a 30-year fixed-rate mortgage during the March 2020-through- February 2021 period will be about 0.5 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 February 2020 it remained 38.6% below the all-time high of $1,309 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 3.5% in February 2020 (Figure 2), and the real U.S. median sale price in June 2006 was $252,072 (or $197,000 in 2006 dollars), compared with a February 2020 median of $223,502.

 Figure 2: "Typical Mortgage Payment" Homebuyers Face Trended Below Year-Ago Level in February 2020

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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 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.