Studying the Correlation Between Mortgage Rates and Affordability

Analysis from MyMove found that while the average rate for a 30-year fixed-rate mortgage is near historic lows, the National Association of Realtors found home purchases fell 1.7% in 2019. 

One of the factors studied is the correlation between income and mortgage rates—more specifically the difference 1% can make. 

Working under the assumption a mortgage payment was $1,000 on a $360,000, a consumer would pay $33,233 in interest with a mortgage rate of 3.65%. The total amount of interest paid skyrockets to $101,936 if the mortgage rate grows by just 1% to 4.65%. 

The good news, the report found, is that the American consumer is making more money than ever before—$89,930. Home prices, however, are growing at a faster rate than income. 

MyMove reports that the average sales price for a home last year was $377,500—growing by more than $100,000 since the start of the decade. 

While an average income in 2019 was sufficient to purchase a home, the recommended 20% down payment represents the largest share of household income than ever before—84%. A 10% down payment represents 42% of an average income and 5% down payment is just 21% of income. 

Prospective buyers would have to save $75,500 for a recommended 20% down payment on an average priced home. 

Also hindering prospective buyers’ ability to purchase homes are growing debt numbers. The $36,000 in debt by Gen Xers is the most across the different generations. Gen Xers have 30% of their debt wrapped up in their mortgage. 

Twenty-five percent of debt for millennials is credit card debt and Gen Zers’ student debt accounts for 20% of their total debt—the highest among the generations. 

First American Financial Corporation, while noting house prices rose 1.2% from October to November 2019, found the five markets where affordability rose the most 

San Jose, California, saw affordability grow the most. The Bay Area metro was followed by Baltimore; Riverside, California; San Francisco; and Denver. 

First American Chief Economist Mark Fleming said San Jose’s affordability rise is due to slower home-price appreciation compared to other markets. 

“Finally, the intricate dance between house-buying power and nominal house price appreciation becomes clear when comparing the cities taking the final top spots: San Francisco and Denver,” said Fleming. “The improvement in affordability in San Francisco was slightly greater than Denver due to slower nominal house price appreciation (3% percent versus Denver’s 4.2 %), even though house-buying power in Denver outpaced San Francisco by 0.6 percentage points.”