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Homebuyers’ Mortgage Payments Up Three Times Faster Than Prices

Jan 29, 2019 10:16:34 AM

MORTGAGE RATE AND PRICE FORECASTS FOR 2019 SUGGEST SLOWER GROWTH FOR “TYPICAL MORTGAGE PAYMENT” THIS YEAR

While the median price paid for a home nationally had risen by just over 5 percent year over year as of last October, the principal-and-interest mortgage payment on that median-priced home had increased by 17 percent, mainly because of the 2018 rate hikes.

However, some forecasts for home prices and mortgage rates indicate mortgage payments will rise at a much slower pace – closer to 7 percent – this year. That’s based on a 4.8 percent annual gain in home prices by October 2019, according to the CoreLogic Home Price Index Forecast, and a 0.2-percentage-point gain in mortgage rates over that period, based on an average of six rate forecasts.[1]

Mortgage Rates vs Year over Year

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 percent down payment. It does not include taxes or insurance. The typical mortgage payment is a good proxy for affordability because it shows the monthly amount that a borrower would have to qualify for to get a mortgage to buy the median-priced U.S. home.

The U.S. median sale price in October 2018 – $218,733 – was up 5.2 percent year over year, while the typical mortgage payment was up 17.0 percent because of a 0.9-percentage-point rise in mortgage rates over that one-year period.

The CoreLogic HPI Forecast suggests the median sale price will rise 2.5 percent in real, or inflation-adjusted, terms over the year ending October 2019 (or 4.8 percent 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 $918 in October 2018 to $963 by October 2019, a 4.9 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year increase in October 2019 would be 7.2 percent.

National Homebuyers Typical Mortgage Payment

An IHS Markit forecast indicates that real disposable income will rise by just under 3 percent over the next year, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.

When adjusted for inflation[2] 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 October 2018 it remained 28.0 percent below the all-time peak of $1,275 in June 2006. That’s because the average mortgage rate back in June 2006 was about 6.7 percent, compared with an average rate of about 4.8 percent in October 2018, and the real U.S. median sale price in June 2006 was $247,067 (or $197,200 in 2006 dollars), compared with an October 2018 median of $218,733.

[1] 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.

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

Topics: mortgage finance

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