Mortgage & Housing Costs

A cautionary note (please pardon the math on a Friday) on home prices and home mortgage affordability in the short- to intermediate-term future. This note can also be useful for those with HELOC loans, or home equity lines of credit, with floating interest rates.

Inflation has recently had an overlooked side effect: a decline in the amount of home that a given monthly mortgage payment buys. The obvious factor is that interest rates on 30-year mortgages have skyrocketed from around 3% about 10 months ago to over 7% today. (Note, there is a sound but painful reason for interest rates to have risen. Historically, higher interest rates are one of the most proven ways to gradually – emphasize, “gradually” – control inflation or slow down an over-heated economy).

In buying a house using a mortgage, the situation turns into kind of a “seesaw” between the amount put down and how that amount translates into the monthly payment. 

The not-so-obvious factor around home price affordability is how much a given mortgage payment buys. Recently that amount has dropped A LOT.Take for example, a home buyer looking to pin down a $2,500 monthly mortgage payment, NOT including property taxes:

  • Earlier this year, with interest rates around 3% for a 30-year mortgage, and 20% down on a home purchase (meaning borrowing $600,000) the $2,500 monthly mortgage payment NOT including property taxes bought a home priced as high as $750,000.*
  • Closer to today with mortgage rates up over 7%, with a buyer putting 20% down, the same $2,500 monthly mortgage payment buys only about $475,000 of house. And, yes, that means the amount borrowed went down to $380,000. Borrowing any more would mean a higher mortgage payment, plus property taxes.

In buying a house using a mortgage, the situation turns into kind of a “seesaw” between the amount put down and how that amount translates into the monthly payment. Several things can tilt here:

  1. The buyer can somehow find a way to make a bigger monthly payment (plus property taxes). This could be possible and/or risky.
  2. The buyer can find a way to put down a larger down payment. This could be possible or risky & too expensive.
  3. The buyer can buy a less expensive house, giving relief to the whole equation. (Also meaning home prices overall could come down to meet demand.)

All of these scenarios may be doable. But the cautionary note is for home sellers to keep these concepts in mind, especially #3 above. Home prices may need to come down in order to allow buyers, in general, to afford homes.

Every geographical market is different, with different levels of employment and income levels. The strongest markets may be slightly less affected or affected further into the future. Knowledge of these factors can help in planning and having an “eyes wide open” outlook on home buying, home selling and home remodeling decisions.

*Try checking out:

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