Mortgage rates hit the highest level in decades. See the impact on Sacramento-area homebuyers

Typical monthly housing costs for homebuyers in the Sacramento region have risen more than 50% in the last two years, thanks mostly to skyrocketing mortgage rates.

Two years ago, the average interest rate for a 30-year fixed mortgage nationwide was 2.87%. Assuming a 10% down payment, homebuyers purchasing a home at that price would face monthly payments of about $2,900, including property taxes, private mortgage insurance and homeowner’s insurance.

Largely in response to the U.S. Federal Reserve raising interest rates to fight inflation, the average mortgage rate had risen to about 7.23% — the highest rate in two decades. That translates to monthly payments of about $4,400.

The increase is mitigated slightly by a slowdown in home price increases. A typical home in the Sacramento region costs about $572,000, up about 6% from two years ago.

Mortgage rate increases represent a huge shift in housing affordability. Financial advisers often say not to spend more than one-third of income on housing costs. In 2021, that meant a household earning about $100,000 a year could afford the region’s typically-priced home.

Today, it means a household would need to earn more than $150,000 a year to afford a typical home. Only about 23% of Sacramento households earn more than $150,000, according to the latest census figures.

Sacramento’s most expensive communities

The most expensive community in the region is Granite Bay, where the typical single-family home costs about $1.1 million. That translates to a housing payment of about $8,500 a month, up from $5,700 a month two years ago. To comfortably afford a housing payment that large, a household would need to make around $300,000 per year.

The typically-priced home in El Dorado Hills, Davis and Loomis would cost between $6,800 and $7,200 a month. A typically-priced home in Folsom and Rocklin would cost between $5,000 and $6,000 a month.

While those prices may seem high, they would be a bargain in the Bay Area. In the San Francisco metro, the typically-priced single family home is valued around $1.2 million.

Sacramento’s mid-range communities

Two years ago, buying a typically-priced home in Sacramento’s mid-range communities would result in a monthly housing payment between $2,500 and $3,500.

Today, typical homes in those same communities will mostly run between $4,000 and $5,000 a month.

Places like Elk Grove and Roseville that have drawn middle-class households for much of the last decade are quickly climbing out of reach. To comfortably afford a home in one of those two cities, a household would need to make about $175,000 a year.

Sacramento’s most affordable communities

Sacramento’s most affordable communities are too expensive for most households in the region.

The typically-priced single-family home in the Florin community of south Sacramento costs around $403,000, a cheaper price than any other large community in the region. That translates to monthly housing payments of around $3,100.

A household would need to earn about $110,000 a year to comfortably afford that home. The median household income in the Sacramento region is about $84,000. In the city, the median is about $75,000, according to the census.

Methodology

Monthly housing payments are influenced by a complex mix of factors, including interest rates, buyer credit scores, insurance premiums and the size of a buyer’s down payment. Any analysis that seeks to pin down a typical housing payment is based on assumptions. Here are the assumptions used by The Bee:

Home prices: The Bee used Zillow’s Home Value Index for single-family homes for July 2021 and July 2023. This is close to a median value — but a little more complicated. Zillow suggests describing it as a “typical home value.”

Mortgage Rates: The Bee used average national mortgage rates for August 26, 2021 and August 24, 2023, as listed by Freddie Mac.

Down payments: According to the National Association of Realtors, the average down payment is equivalent to about 7% of the home’s price for first-time buyers and 17% of the home’s price for repeat buyers. The Bee assumes a 10% down payment. A 20% down payment would lower monthly housing costs by several hundred dollars, due to a lower principal and the elimination of private mortgage insurance.

Private mortgage insurance: Homes bought with down payments below 20% of home value usually require private mortgage insurance for several years. Freddie Mac says annual private mortgage insurance typically runs between 0.36% and 0.84% of the loan amount. The Bee assumes annual PMI payments of 0.45% of the home’s value.

Homeowner’s insurance: According to Bankrate.com, annual homeowner’s insurance payments nationwide average about 0.58% of dwelling coverage. However, a home’s value is the worth of its dwellings and land. The Bee assumed that land comprises about 30% of a home’s worth and set annual insurance costs to 0.38% of the home’s value.