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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.”

About Author: Mike Albanese

A graduate of the University of Alabama, Mike Albanese has worked for news publications since 2011 in Texas and Colorado. He has built a portfolio of more than 1,000 articles, covering city government, police and crime, business, sports, and is experienced in crafting engaging features and enterprise pieces. He spent time as the sports editor for the "Pilot Point Post-Signal," and has covered the DFW Metroplex for several years. He has also assisted with sports coverage and editing duties with the "Dallas Morning News" and "Denton Record-Chronicle" over the past several years.

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