from CoreLogic
— this post authored by ANDREW LEPAGE
Homebuyers in the nation’s 10 largest metropolitan areas have seen at least a modest improvement in affordability this year thanks to slower home-price growth, a sharp drop in mortgage rates and income gains.
The monthly principal-and-interest payment on the median-priced home – what we call the “typical mortgage payment” [1] – fell year over year between 3.2% and 8.6% this June among the top 10 metro areas (Figure 1). Nationally the typical payment fell 6.1% in June, compared with annual gains of 14.1% and 9.4% during the same month in 2018 and 2017, respectively.
Beyond the typical mortgage payment’s year-over-year decline, many homebuyers are better off in 2019 because of at least modest income gains. Increases in real personal disposable income averaged about 3.3% during this year’s first two quarters, according to IHS Markit.
As recently as January this year none of the top 10 metros showed a year-over-year decline in the typical mortgage payment. Nationwide, this year’s first annual decline was 2.9% in May.
In recent years the nation’s typical mortgage payment was driven up sharply by both rising home prices and mortgage rates, which climbed last November to a seven-year high of 4.9% for a fixed-rate 30-year loan, according to Freddie Mac. By this June that average rate had dropped to 3.8% and since then it has edged lower – to around 3.6% in late August and early September. Home price growth has also trended lower this year. Seven of the top 10 metros experienced lower annual home price growth this June compared with June 2018, according to the CoreLogic Home Price Index. Nationwide, home price growth fell by almost half – from 6.1% in June 2018 to 3.3% this June.
While the inflation-adjusted, or “real” [2] typical mortgage payment trended higher in all of the top 10 metros over the past few years (Figure 2), in eight of the metros the payment has remained below peak levels reached in 2006 and 2007 (Figure 3). Real payments in Denver and San Francisco peaked in mid-2018 but as of this June the payments were 7.3% and 15.7% below those peaks, respectively.
The main reason the real typical mortgage payment remains well below record levels in most of the country is that the average rate on a fixed-rate 30-year mortgage back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7%, compared with an average mortgage rate of about 3.8% this June. Also, the real U.S. median sale price in June 2006 was $249,232 (or $197,100 in 2006 dollars), compared with $235,433 in June 2019.
The nationwide typical mortgage payment’s high point in 2006 reflects an abundance of subprime and other risky home financing products – products no longer widely available – that allowed homebuyers to stretch to their financial max. That created what some people consider an artificial price peak in 2006. An alternative reference point for comparing today’s typical mortgage payments is 2002, right before the worst of the risky loans inflated a historic home price bubble. Four of the top 10 metro areas – led by Los Angeles and San Francisco – had real typical mortgage payments in June 2019 that were higher than in June 2002 (Figure 4), meaning affordability is worse now.
Footnotes
[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] Inflation adjustments made with the U.S. Bureau of Labor Statistics Consumer Price Index (CPI), Urban Consumer – All Items.© 2019 CoreLogic, Inc. All rights reserved.
Source
