Everyone is intensely focused on the prices of homes when the real focus should be the ability to write a check for the monthly mortgage payment.

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 San Diego County was $94,391. That sounds incredibly cheap and an unbelievable deal; however, mortgage rates averaged 13.75% and the median household income was only $18,000. 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 San Diego County climbed to $589,000, a lot lower than today’s $850,000 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 $62,000. 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 when 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 $90,000 in San Diego 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.

Taking a closer look at monthly payments and where they stand today, for a $1 million home and 10% down, a buyer is looking at a monthly payment of $3,843 at today’s 3.1% rate. When rates were lower this year, at 2.75%, it was a savings of $169 per month or $2,028 per year. The 5-year savings would be $10,140. Many expect rates to rise next year to 3.5%. That would be an additional $198 more per month compared to today, or $2,376 per year, or $11,880 over 5-years. At 4%, it would be an additional $5,448 per year or $27,240 in 5-years. In November 2018, rates reached nearly 5%. That would be an extra $988 per month or just under $12,000 annually. In 5-years, it adds up to almost $60,000.

Prior to the Great Recession, mortgage rates were at 6.34%. For a $1 million home, the monthly payment would be $5,594 every single month. The monthly difference of $1,751 per month adds up fast. Annually, it is $21,012 more. In 5-years the difference totals $105,060.

These comparisons put today’s housing run into proper perspective. Rates are not projected to climb to 4% or higher any time soon, yet it is where rates have been in the past. The higher rates were accompanied by lower household incomes as well. Current trend lines indicate that low mortgage rates are here to stay, and household incomes will continue to methodically climb.

Copyright 2021 – Steven Thomas, Reports On Housing – All Rights Reserved.