Mortgage Up Despite Lower Interest Rates
By Erick Eschker
affordability has been driven to all time lows in Humboldt County.
According to the Humboldt Association of Realtors, seven years ago the
percent of area households that could afford the median priced home was
about fifty percent. Today, it is 10 percent. That's right, 10 percent.
But many people have told you that housing is more affordable than
ever, since interest rates are at historic lows. They have told you
that even though house prices have skyrocketed over the last five
the lower mortgage interest rates have kept housing affordable. Don't
believe them. It's true that, by itself, lower interest rates will mean
a lower montly mortgage payment. But housing price increases have more
than made up the difference. In February of this year (the most recent
data we have) the monthly mortgage on the median priced home at the
30-year, fixed rate loan with 20% downpayment was $1,647. Just four
years ago, the mortgage
was $763. That's a doubling in five years.
Today, however, far fewer buyers have a 20% down payment. In 2005, many
Calfornias bought with no money down. In Humboldt County, that would
lead to a monthly mortgage of $2,059. I wonder how many people
currently paying mortgages could afford that. Of course, the way to
accurately compare dollars across time is to correct for inflation, but
when we do this for mortgages, the story is the same. According the to
following graph, over the five years from 1997 to 2002, the inflation
adjusted monthly mortgage in Humboldt County was essentially flat at
about $400 (in 1982-84 dollars). From 2002 to today, the inflation
adjusted mortgage has doubled.
did monthly mortages double in five years despite lower interest
rates? The answer comes from looking at what happened to housing prices
and the quantity sold. Lower interest rates will reduce the cost of
housing, which will lead to an increase in sales and a drop in the
price. However, from 2002 to 2005, housing prices rose and lots more
were sold. The only explanation that can account for this is an
increase in the demand for housing. According to the National
Association of Realtors, sales of second homes increased by 16% in 2005
and were an astonishing 40% of all home sales. Additionally,
lenders reduced down payment requirements and many more borrowers used
interest only and income stated loans.
There is good news for future first time home buyers, however. Since
low interest rates did not mean lower monthly mortage payments, rising
future interest rates may not mean rising monthly mortgage payments.
All the "action" over the past few years has been with prices, not with
interest rates. So if demand falls in the future (when everyone buying
second homes realized that they are not earning a good rate of return),
prices will fall,
which will likely lower monthly mortgage payments regardless of rising
interest rates. And there is lots of evidence that prices have begun to
fall around the state.
Housing inventories are rising to record levels as investors dump their
properties. In Humboldt County, for sale listings have risen 20
percent in the last month. And regulators are scrutinizing exotic
mortgages more and more. The effect of all of this, regardless of what
happens to interest rates, will likely be lower house prices in the
future, lower monthly mortgage payments, and more affordable housing. And this
is a good thing for future home buyers.