Mortgage Rates Still Below Average, but California Homes Require 58% of Income – Orange County Register

“Numerology” attempts to find reality within various measurements of economic and real estate trends.

Buzz: Did you know that today’s mortgage rate is below average?

Fuzzy mathematics: The average 30-year mortgage rate in September was 6.1%. That’s more than double the 2.9% from a year ago, but it’s also well below the 48-year average of 7.8%.

Source: My trusted 1975 spreadsheet of key home buying and affordability metrics.

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Yes, mortgage rates are higher. How many times have you heard, “When I bought my first house, the interest rates were (a bit ridiculously high)” lately?

Here are 36 reasons why California is so damn expensive

But mortgage rates are only one piece of the home buying puzzle. It’s no secret that buying a home in this state has never been an easy financial endeavor.

Consider what we learned when these rates were combined with rising prices and moderately higher paychecks. My spreadsheet estimated that California’s home payments have taken an average of 43% of income over the past half-century — a heavy drain on home seekers.

But by 2022, even at “below average” rates, buying a home will require 58% of a family’s budget. Yes, 58%.

The details

Let’s review the pieces of the affordability puzzle, starting with home prices. They’ve been inflated by numerous factors, including a prolonged fall in mortgage rates…until 2022.

California’s median selling price for a single-family home has averaged $331,100 over the last half century. This year it’s $834,000, a jump of 152%!

Next, we combine prices and mortgage rates to estimate the payment owed to the lender.

A typical California buyer has financed the purchase since 1975 with an average monthly payment of $1,627 – assuming a 20% down payment – versus $4,043 at current prices and rates. That’s 148% higher.

Then consider the paychecks that make the house payments. The median California household income has averaged $45,700 since 1975, up from $84,022 today. But 84% higher wages are not fast enough to fully cover rising prices.

Also, don’t forget the huge down payments required to keep the monthly check reasonably bearable.

A 20% drop has seen Californians raise an average of $66,000 since 1975. In 2022, that rose to $167,000 – an extra $101,000!

Let me summarize affordability with a historical snapshot: when mortgage rates topped 18% in 1981, a typical California home cost $117,000.

Inflation matters

Averages tell us that mortgage rates should be above the rate of inflation. Econ 101 agrees because people who lend don’t want to be repaid in dollars that are being severely devalued by the rising cost of living.

Since 1975, mortgage rates have averaged 4.1 percentage points ABOVE the 3.6% inflation rate, according to the consumer price index.

But in September 2022, the CPI rose at an annual rate of 8.3% – 2.2 points ABOVE the average mortgage rate of 6.1%.

The Federal Reserve is trying to fix this economic oddity in 2022. That’s why mortgage rates have skyrocketed.

Mortgages may remain “underperforming” for the rest of 2022, but this inverse gap between mortgage and inflation shows you why rates well above 7% are very likely to come.

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Mortgage rates have been at or below half the long-term average for much of 2019-2021. Can the broader economy easily digest the rise in financing costs in 2022? Mortgage Rates Still Below Average, but California Homes Require 58% of Income – Orange County Register

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