Monthly Mortgage Payment
The low mortgage rate environment has resulted in substantially smaller payments, allowing home prices to rise considerably as well.
Everyone is acutely aware that home prices have been soaring for the past year-and-a-half. They have far exceeded the runup in values prior to the Great Recession. This has many people on edge, wondering how values can continue to rise beyond their current record highs. In focusing just on prices, it is no wonder they fear an end to the pandemic housing run.
In analyzing today’s housing market, it is not just about home prices. Household incomes and mortgage rates over time tell a completely different story. In 1980, the median detached home price in Orange County was $108,000. That sounds incredibly cheap and an unbelievable deal; however, mortgage rates averaged 13.75% and the median household income was only $22,000. The monthly mortgage payment was a larger proportion of a new homeowner’s monthly income than today.
Similarly, in 2007, prior to the Great Recession, the median detached home price in Orange County climbed to $728,000, a lot lower than today’s $1,120,000 level as reported by the California Association of REALTORS® for the month of October. Yet, mortgage rates averaged 6.34% and the median household income was at $73,107. The monthly mortgage payment was an even larger proportion of a new homeowner’s monthly income compared to today, significantly larger.
According to Freddie Mac’s Primary Mortgage Market Survey®, a 30-year fixed rate mortgage is currently at 3.1%. Yes, rates were lower earlier this year, but in comparing today to any time prior to the start of the pandemic in March 2020, today’s rate would be a record low. The lowest rate prior to COVID occurred in November 2012 at 3.31%. Household incomes have been methodically rising over time, which will most likely surpass $100,000 in Orange County this year. The current low-rate environment, coupled with higher incomes, continues to entice a flood of buyers to pursue the purchase of a home.
In analyzing the housing market and where it stands today, home prices are a critical component, yet household incomes and mortgage rates are equally important factors as well. As household incomes rise, families’ monthly paychecks rise. As interest rates drop, home buyers are looking at smaller monthly payments.
Excerpt taken from an article by Steven Thomas.