COVID pandemic helps push mortgage rate down 35% in 2 years.

No elixir compares to collapsing mortgage rates when it comes to dramatic home price gains with more, not less, affordability.

Last week Freddie Mac reported the 30-year fixed-rate hit an all-time-record-low for the 14th time. And the 15-year Freddie fixed-rate recently hit an all-time-record-low for the 10th time.

With mortgage rates at record lows, what does that do for home prices?

“That has put the foot on the accelerator,” said Jordan Levine, chief economist of the California Association of Realtors.

Consider and compare this year’s pandemic-driven mortgage rate free fall. Freddie Mac’s 30-year fixed rates averaged 3.01% from April through November 2020. Mortgage rates averaged 4.63% during that same period in 2018. That is a jaw-dropping 35% mortgage rate decline.

Rocket fuel for home prices

By comparing similar time periods, we find that four Southern California counties median home prices increased by an average of 13.35%, according to an analysis done by Irvine-based Attom Data Solutions.

Riverside County led the jump with a 16.8% increase ($368,000 to $430,000). San Bernardino County saw the second-highest median price gain at 14.3% ($315,000 to $360,000). Los Angeles County jumped 13.1% ($601,000 to $680,000). And Orange County increased 9.2% ($705,000 to $770,000).

The statewide median home price jumped nearly 12% during those same comparable time periods ($491,500 to $550,000), also according to Attom.

How about jobs affecting home prices? Not at all. Home price gains chugged away in spite of crushing unemployment. California unemployment ran about 4.2% during the 2018 timeline. Although November’s comparable unemployment numbers are not in yet, statewide unemployment has averaged 13.24% since the pandemic hit.

The most common question I receive from column readers is, “If I buy now, am I buying at the top of the market?”

“Long-term it doesn’t matter. That is the wrong question to ask,” said Tendayi Kapfidze, Lending Tree’s chief economist.

Instead, the budget is key, he said.

“Overextending is more important than if you paid on the high end,” Kapfidze said. “How much expense can you (comfortably) carry?”

Even with lofty home prices, lower mortgage rates are the great equalizer. Consider the statewide median home prices and matching interest rates listed above.

Let’s say you put 20% down ($98,300) on the 2018 $491,500 median home price. You’d have a $393,200 loan amount. The principal and interest payment on a 30-year fixed would be $2,022.77 assuming Freddie Mac’s average 4.63% on that timeline.

Now assume a 20% down on the 2020 median price of $550,000 ($110,000) which leaves you with a loan amount of $440,000. Your principal and interest payment would be $1,857.43 assuming a 30-year fixed at Freddie’s 3.01% mortgage rate. That’s an impressive $165 monthly payment reduction for a property that is more expensive by 12% or $58,500.

Acknowledging the higher down payment of $11,700 and increased monthly property taxes of $61, the total house payment is still 5% lower or $104 less than 2018’s California median-priced home compared with today’s pandemic pricing and rates.

As the pandemic worsens and California and the rest of the nation hunker down again, you can expect a further drop in mortgage rates. That also means even higher home prices to come. But let’s remember affordability, not price. If you can reasonably budget the house payment, and your job is reasonably secure, the price is less concerning.

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Jeff Lazerson - Mortgage Columnist since 2011