Wed. Dec 7th, 2022

Home payments have gone way up due to higher house prices and rising mortgage interest rates. But how much of the increase in payments comes from price and how much mortgage rate? It turns out that interest rates are the bigger factor, but higher prices also play a large role.

In the past 12 months, 30-year fixed rate mortgages have increased from 3.0% to 5.3% (as of this writing). Home prices for existing houses across the country increased by 18.1% in the 12 months through April 2022 (the latest available data).

Imagine a person buying a house for $450,000, the median listing price according to the National Association of Realtors. We run the numbers assuming a 20% down payment. The price isn’t important, as the percentage increase in monthly payments scales up or down if we use a different price.

Together the changes in price and interest rate pushed the monthly payments on this hypothetical house up 57%, from $1,274 to $1,999.

To split that increase into price and interest rate effects, the arithmetic can be run as if mortgage rates had not changed but home prices had increased. And then abother calculation can reflect higher mortgage rates and unchanged home prices.

The mortgage factor by itself accounted for a majority of the cost change, $408 of the $725 increase. The price factor alone was responsible for $239 of the change. The remaining $77 comes from the higher mortgage rate applied to the higher principal. (Calculus students can think of this as the derivative of a product, though the mortgage function isn’t quite that simple.)

So the increase in mortgage interest rates was the bigger factor, but higher home prices also raised costs significantly.

The future likely holds higher mortgage rates as the Federal Reserve continues to tighten short-term interest rates, although current long-term interest rates also reflect expected future increases in short-term rates. As for home prices, they probably will level out soon. These higher monthly payments will discourage new home buyers, as will the inflation in most other living costs. When employment gains slow down, as they inevitably will, then demand will drop off further.

Monthly payments on a house will not fall back to where they were last year, at least not until we have a doozy of a recession. But late 2020 and all of 2021 were really unusual in housing history, offering once-in-a-lifetime opportunities for first-time homebuyers.

The best advice at this point in time is the old standard: if you find a house that you like and can afford, go ahead and buy it now. If you can’t afford it, don’t stretch because everyone else made big money in real estate; that day is over for a while. And if you don’t like the house, don’t saddle yourself with it just as an investment. But if it’s the right house for you at a price you can afford, don’t waste your time wondering if a better deal is right around the corner. Get the deal done and enjoy your new home.

Related: Mortgage Refinance Rates

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