September 21, 2017

Watch Mortgage Rates for Affordability Impact

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Watch Mortgage Rates for Affordability Impact

Mortgage rates can affect affordability more than home price appreciation, according to Andrew LePage, CoreLogic’s professional in research analysis.

Low interest rates have helped mitigate some of the impact from household incomes that have failed to keep pace with rising home prices in recent months, LePage says. However, if mortgage rates trend higher—as they are largely predicted to—what will happen to affordability? LePage uses a CoreLogic measure on the “typical mortgage payment” to factor in the impact to affordability.

The average monthly payment has increased in recent years, but it remains significantly lower than before the housing crisis on both an inflation-adjusted and rate-adjusted basis, LePage says. At the measure’s peak in June 2006, LePage says the inflation-adjusted typical mortgage payment was $1,244—that is 47 percent higher than the average payment this June. He notes that the average interest rate in June 2006 was 6.7 percent compared to 3.9 percent in June 2017. Also, the median sales price in 2006 was $199,900, which is the equivalent of $241,495 expressed in today’s dollars. That is higher than today’s median sales price of $225,000, as of June.

LePage says it is misleading to only consider home prices when considering affordability. For example, the median home price was 5.9 percent higher in March compared to a year earlier in nominal terms, but the average mortgage payment had jumped 12.6 percent because mortgage rates had edged up 0.5 percentage points in the 12-month period, he notes.

CoreLogic is projecting mortgage rates, inflation, and income to increase gradually over the next year. Based on projections, LePage forecasts that the inflation-adjusted typical mortgage payment will increase from $848 this June to $983 by June 2018. That would mark a 15.9 percent year-over-year increase.

“Real disposable income is projected to rise about 3.6 percent over the same period, meaning next year’s home buyers would see a larger chunk of their household budget devoted to their mortgage payments,” LePage writes.  

Source: “How Rising Interest Rates Can Decrease Affordability More Than Home Price Increases,” CoreLogic Insights Blog (Aug. 11, 2017)