Forecasts Suggest a nearly 13 Percent Gain Over the Next Year

U.S. home prices have risen more than 6 percent over the last year but that’s only part of the challenge for home shoppers, who face mortgage payments that have risen about 12 percent year over year because of higher mortgage rates.

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 in order to get a mortgage to buy the median-priced U.S. home. When adjusted for inflation, the typical mortgage payment also puts current payments in the proper historical context.

The change in the typical mortgage payment over the past year illustrates how it can be misleading to simply focus on the rise in home prices when assessing affordability. For example, in October 2017 the U.S. median sale price was 6.3 percent higher than a year earlier in nominal terms, but the typical mortgage payment was up 12.1 percent because mortgage rates had increased by more than 0.4 percentage points over that 12-month period.

Figure 1 shows that while the inflation-adjusted typical mortgage payment has trended higher in recent years, in October 2017 it remained 36.2 percent below the all-time peak of $1,259 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 3.9 percent in October 2017, and the inflation-adjusted median sale price in June 2006 was $244,318 (or $199,900 in 2006 dollars), compared with a median of $212,680 in October 2017.

An IHS Markit forecast calls for inflation and incomes to rise gradually over the next year, while a consensus forecast[1] suggests mortgage rates will gradually rise by about 60 basis points between October 2017 and October 2018. The CoreLogic Home Price Index forecast suggests the median sale price will rise 3.2 percent in real terms over the same period. Based on these projections, the inflation-adjusted typical mortgage payment would rise from $803 in October 2017 to $891 by October 2018, an 11 percent year-over-year gain (Figure 2). (In nominal terms the typical mortgage payment would rise 12.9 percent over the next year.) Real disposable income is projected to rise by around 3 percent over the same period, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.

[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. 

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