Mortgage rates still below average, but California home loans require 58% of income - OCRegister

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Published: Oct 5th, 2022
Mortgage rates still below average, but California home loans require 58% of income - OCRegister

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Topline Yes, mortgage rates have been higher.
Yet mortgage rates are just one part of the home purchase puzzle.
They’ve been inflated by numerous factors, including a long-running dip in mortgage rates … until 2022.
Next, we’ll combine prices and mortgage rates to gauge the payment owed to the lender.
Let me summarize affordability with a historic snapshot: When mortgage rates topped 18% in 1981, a typical California house cost $117,000.
Inflation matters Averages tell us that mortgage rates should be above the inflation rate.
Since 1975, mortgage rates have run an average 4.

Mortgage rates still below average, but California home loans require 58% of income - OCRegister

“Numerology” tries to find reality within various measurements of economic and real estate trends. Buzz: Did you know today’s mortgage rate is below average? Fuzzy math: September’s average 30-year mortgage rate was 6.1%. That’s more than double 2.9% a year ago, but it’s also well below the 48-year average of 7.8%. Source: My trusty spreadsheet review of key homebuying and affordability metrics dating to 1975. Topline Yes, mortgage rates have been higher. How many times have you recently heard “when I bought my first home, rates were (something ridiculously high)”? Yet mortgage rates are just one part of the home purchase puzzle. It’s no secret buying a home in this state has never been an easy monetary endeavor. Consider what we learned when that rates are combined with rising prices and moderately larger paychecks. My spreadsheet estimated California’s house payments claimed an average 43% of incomes in the past half-century — a steep burden for house hunters. But in 2022, even with “below average” rates, buying a home requires a 58% slice of a family’s budget. Yes, 58%. The details Let’s review the pieces of the affordability conundrum, starting with home prices. They’ve been inflated by numerous factors, including a long-running dip in mortgage rates … until 2022. California’s median sales price of a single-family house has averaged $331,100 in the past half-century. This year, it’s $834,000, a 152% jump! Next, we’ll combine prices and mortgage rates to gauge the payment owed to the lender. A typical California buyer since 1975 has financed the purchase with an average $1,627 monthly payment — assuming 20% down — vs. $4,043 at current prices and rates. That’s 148% higher. Then consider the paychecks making the house payments. The median California household income averaged $45,700 since 1975 vs. $84,022 today. Yet 84% higher pay isn’t a fast enough jump to fully cover the rising prices. Plus, don’t forget the huge down payments required to keep the monthly check somewhat tolerable. At 20% down, Californians had to come up with an average $66,000 since 1975. In 2022, that grew to $167,000 — an extra $101,000! Let me summarize affordability with a historic snapshot: When mortgage rates topped 18% in 1981, a typical California house cost $117,000. Inflation matters Averages tell us that mortgage rates should be above the inflation rate. Econ 101 agrees because folks who lend don’t want to be repaid with dollars badly devalued by the rising cost of living. Since 1975, mortgage rates have run an average 4.1 percentage points ABOVE the 3.6% inflation rate as shown by the Consumer Price Index. Yet in September 2022, the CPI was increasing at an 8.3% annual rate — 2.2 points ABOVE the 6.1% average mortgage rate. That economic oddity is what the Federal Reserve is trying to fix in 2022. That’s why mortgage rates soared. Mortgages may remain “below average” for the rest of 2022, but this inverted mortgage-to-inflation gap shows you why upcoming rates well above 7% are very possible. Bottom line Mortgage rates ran at half the long-term average or less for much of 2019-2021. Can the broad economy easily digest 2022’s surge in financing costs? Related Articles Housing | End of Fed rate hikes? ‘When the data show what we need to see, then we will downshift’ End of Fed rate hikes? ‘When the data show what we need to see, then we will downshift’ Housing | 19% mortgages? That’s what 1980s homebuyers were paying 19% mortgages? That’s what 1980s homebuyers were paying Housing | Mortgage rates rise for 7th week to highest in 16 years Mortgage rates rise for 7th week to highest in 16 years Housing | In a world of 6% mortgage rates, savers are the winners In a world of 6% mortgage rates, savers are the winners Housing | 30-year mortgage rates soar to 6.7%, highest in 15 years A big housing question is what California employers do next because you need a solid paycheck to be a homebuyer. Again, consider the averages, which say it’s a hot job market. California’s near-record low unemployment rate of 4.1% in August is far under the 7.3% statewide average since 1975. Look, a well-above-average California employment picture couldn’t keep homebuying from hitting a deep slump this summer, courtesy of today’s “below average” mortgage rates. What happens if bosses slow their hiring pace? Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
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