Key Highlights
- Summary of remarks by CoreLogic’s chief economist
- Cash needed to buy & monthly mortgage payment two sides of affordability
Opportunities and Challenges for Homebuyer
According to Frank Nothaft, chief economist with CoreLogic, there are two dimensions of housing affordability that potential homebuyers must consider…home prices and low-cost financing or interest rates.
Home prices and the up-front cash needed to buy are the challenges of home affordability; mortgage rates and the monthly payment necessary to cover monthly housing costs are the opportunities. The higher the home price, the more up-front cash needed to buy the house. The higher/lower the interest rate or financing rate, the higher/lower the monthly mortgage payment needed to cover monthly housing costs.
Comparison of Identical Home Purchase One-Year Apart
Let’s say your client bought a home in January 2020 and your client needs a loan of $250,000. The home is then taken off the market before your client buys it.
Then the home is listed again in January 2021. Now the mortgage rate is -1.1% lower than in 2020 but its price is +10% higher.
January 2020 January 2021
Loan Size $250,00 $275,000
Interest Rate 3.7% 2.6%
Monthly P&I $1,154 $1,108
Is the home more/less affordable? Hard to say.
Now let’s look at the same comparison but at a different month.
April 2020 April 2021
Loan Size $250,000 $275,000
Interest Rate 3.3% 3.2%
Monthly P&I $1,099 $1,186
Affordability Lessens When Price and Rates Increase Simultaneously
In April 2021, mortgage rates were no longer low enough to offset the increase of +10% in loan size. Demand may go down when/if both up-front cash needed for a down payment and mortgage interest continue to rise. If/when that happens, we may see a moderation in price growth.
Summary
- Mortgage rates at record loan at beginning of 2021 but increased +0.5% over first three months of this year
- Strong home-price growth has increased amount of up-front cash needed
- Mortgage rates still continue to be less than one year ago BUT home price increases have offset these lower interest rates
- Lack of affordability may lower demand and may dampen home-price growth later into 2021.
Thanks to CoreLogic.
