While fixed-rate mortgage (FRM) interest is currently on a downtrend, over the long term they have increased since last year. As of October 19, 2018, the current average 30- and 15-year FRM rates are 4.7% and 3.98% respectively. The September 2018 30-year FRM figure was 4.5%. Compare this to September 2017, when the average 30-year FRM was 3.7%, resulting in a September 2018 buyer purchasing power index (BPPI) of -9.16. This means the available mortgage funds of buyers decreased by 9.16% during that 1-year period. With the current rates, the mortgage payments on a $500,000 mortgage are 12% higher than last year, contrasted with only a 3% increase in average wages.
Interest rates are expected to go up through the next 30 years, furthering this trend. Fortunately, the BPPI is expected to flatline after 2020, when another recession is predicted. After that point, population growth will result in a support system for the economy and higher median income, opposing the rising sales prices and interest rates. The combined effect will be a stable BPPI, albeit at a lower point than the current available mortgage funds. Adjustable rate mortgages (ARMs) have gone up as well, which combined with the changes to tax laws means ARMs won’t be as favorable as they have been for high-income buyers.
Overall, we’re in a slowdown period. Prices won’t be skyrocketing anymore, and values will soon reflect a more natural appreciation over time as sellers will need to account for lower buyer purchasing power. Though buyers can’t do anything to speed this along, sellers won’t sell if buyers can’t afford their homes.
For charts and more in-depth information, see the following articles: