Housing prices won't fall in 2020 despite the COVID-19 chaos. Sounds crazy? We were shocked by the results, too.
Everyone knows lower mortgage rates lower monthly mortgage payments but by how much? Do they lower monthly mortgage payments a lot or a little? Take a look in dollars and cents.
In the first week of January 1990, the average 30-year fixed-rate mortgage interest rate was 9.8%. The first week of January 2020 it was 3.7%
If you took out a $100,000 mortgage at 9.8%, the monthly principal and interest (P&I) payment is $863 per month. At 3.7%, it’s $460 per month.
But the U.S. dollar was worth a lot more in 1990. That is, $1.00 in January 1990 was equal to $2.02 in January 2020.
So, a $100,000 mortgage in 1990 would be equal to a $202,000 mortgage in 2020.
But house prices have gone up a lot since 1990. According to the Case-Shiller Home Price Index, U.S. house prices in January 2020 are 177% higher than in January 1990.
So, nationwide, a house that cost $100,000 in January 1990 would cost $277,000 in January 2020.
But due to inflation that $277,000 is only worth $137,000 in 1990 dollars.
But the 30-year fixed-rate mortgage rate was 9.8% in January 1990 versus 3.7% in January 2020.
The principal and interest mortgage payment on $100,000 at 9.8% interest would be $863 per month. The principal and interest mortgage payment on $137,000 at 3.7% interest would be $631 per month.
Therefore, adjusting for inflation and mortgage rates, the monthly principal and interest mortgage payment in 2020 is only 73% of the payment in 1990 for the equivalent size and quality house in the U.S.
Finally, the conclusion!
Despite the Corona Recession, it’s unlikely U.S. house prices will fall in 2020, and if they do, it won’t be by much.
Adjusted for inflation and interest rates, house prices aren’t high in most cities and are nothing like in 1990 or 2006.
- Permission to use received from John Wake of Real Estate Decoded