I know this sounds crazy. I was 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? I wanted to find out in dollars and cents.

Interest Rates
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.
Inflation Rates
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.
House Prices
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.
The Numbers
- 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.
Takeaways
Finally, the conclusion!
Despite the Corona Recession, I think 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.
Okay, I was shocked by the results, too!
Prices could fall in 2021, if we’re still in a recession. More likely, U.S. house prices would be more or less flat.
What do you think? What am I missing? Leave a comment.
Warnings
- Nationally, the Savings and Loan real estate bubble peaked in 1990. It wasn’t a typical year… but 1990 is a nice round number.
- Corelogic’s Case-Shiller Home Price Index measures constant quality houses, meaning they measure how much the prices of individual houses increase over time. Even though the average house is larger in 2020 than in 1990, that’s not captured in the Case-Shiller Index.
- I used the Consumer Price Index (CPI-U) to measure inflation. If I had used the Federal Reserve’s preferred measure of inflation, Personal Consumption Expenditures, the 2020 real monthly P&I mortgage payment would have been much closer to the 1990 payment, although still below the 1990 payment.
- Lower mortgage interest rates slowly lead to higher house prices over 2 to 3 years. This is pretty standard thinking among economists. Lower mortgage rates tend to benefit current homeowners and first-time homebuyers who buy when mortgage rates first fall and before the lower rates become monetized into higher house prices.
- Higher inflation has the effect of lowering your future inflation-adjusted mortgage payments. If low mortgage rates foreshadow low inflation, that means your real mortgage payments will stay higher longer. Your mortgage payments are lower in the earlier years of the mortgage but later on your real mortgage payments may be higher than in a higher inflation scenario. Combined with lower rates leading to higher house prices, lower rates and lower inflation can paradoxically lead to higher real debt that doesn’t deteriorate as fast with time.
12 Responses to Why House Prices Won’t Fall in 2020 Despite the Covid-19 Chaos
In addition, Housing starts are down which will add to the housing shortage creating more scarcity.
Great point!
#1 the person who bought in 1990 refinanced a dozen times since then and that cannot be repeated.
#2. Falling rates pushed prices up for 30-40 years and that cannot be repeated.
Very true. The first-time homebuyer in 2020 is NOT going to have the huge tailwind of falling rates which can both lower their monthly payments AND increase the value of their house over 2-3 years.
Millennials are not going to have that tailwind. If, however, inflation took off, that would help those who bought before inflation. House values are famous for keeping up with inflation. (I’m not forecasting high inflation. If we get inflation it probably won’t be for years.
In the medium term, we should see prices fall (how much is debatable). 25% of workers are out of work. The remainder will be hurt by the 25% cutting back on spending. You can buy as much house as the ban will lend you. If you’re in the 25%, that’s zero. If you’re in the other 75%, it’s something but less than 2019.
If the recession is deep and long we could see prices fall for real starting in 2021. We would see sales fall and inventory build for several months before prices really fell. I’m think this afternoon that ~flat for years is a more likely scenario.
Good points all. Hard to have a crystal ball.
The news here in Denver today reported a 30% drop in closings in April, but prices didn’t drop, imho likely due to most contracts in place before the ramifications of the pandemic were understood. That said, I can’t see how a 25% unemployment rate and its concomitant reduction in demand for just about everything won’t create a serious downward pressure on prices.
Yeah, but the number of homes hitting the market is way down too. I think you need to have a huge oversupply of houses for sale before prices fall much. Right now, supplies actually tight. I remember in 2005 from about August to December the number of homes for sale quadrupled! That foreshadowed falling prices in 2007.
Correction. From June to December 2006, the number of homes for sale in Phoenix more than doubled. the inventory quadrupled by June 2006 and was up more than 5x by June 2007. The inventory at the peak of the bubble in June 2005 was, of course, incredibly low but by December 2005 it was already more or less back to “normal” levels.
Another thing I thought about that should be considered are taxes and insurance. While falling rates made larger loan amounts more “affordable,” 17% you concluded, prices rose because people could afford more. Along with the housing price gains came #1 higher taxes and #2 higher insurance. How much of a difference did that make in the overall “affordability” calculation. Presumably it erodes part of the 17%?
Absolutely. I assume taxes and insurance increased faster than inflation, I just don’t know how much. Those increases would make houses less affordable. (Although, there’s a school of thought that says high taxes (and insurance?) tend to slow down house price increases. Might be one reason why Texas didn’t see a bubble the last time. Texas is famous for high property taxes.) But, taxes (and insurance?) vary a ton by state and I assume the changes since 1990 also varied a lot by city and state. I didn’t know how to incorporate it into the “model.” The one thing I would like to add to that model someday would be income. If income is increasing relatively fast, I assume house prices would too. I just don’t know how much.
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