In the chart above, I analyze mortgage payments as a function of interest rates and loan size. Much has been written about the increases in home prices over the past two decades, as the average home in America has nearly doubled (+88%) from $165,000 to $311,000 (orange line). However, concurrent with this increase has been a decline in interest rates (30-year mortgage rates in green), which have fallen from 8.15% to 3.75%.
As a result, the average monthly mortgage payment, assuming a 20% down payment on a home, has increased only 17% over the same period (from $984 to $1152). In underwriting a loan, the banks care about the monthly payment and one’s ability to service it, not overall home value. So, while the average home price has increased 88%, the cost to service the loan on a home that is now twice as expensive has increased only marginally over the same period.
Furthermore, CPI core inflation is up 52% over the same period. So, the conclusion is that mortgage payments are actually less burdensome than they were 20 years ago. If you believe interests rates will continue to fall, it’s hard not to be bullish real estate and rising asset prices.
I am the founder of fibonacci.com and an avid trader. I am also the co-founder of Texas Precious Metals, a top US precious metals company. In 2006 I was a contestant on The Apprentice with future president, Donald Trump. I live in Coeur D'Alene, Idaho, with my wife and five children, where I spend my time hiking, charting, and changing diapers.