Mortgage Payment Calculation And Interest

If you've ever wondered why the run-up in housing prices hasn't pushed inflation through the roof, it's because the Fed only cares about your mortgage payment. Since the mortgage payment has as much to do with the interest rate and the terms as it does with the cost of the house, the inflation in home prices has been hidden for years.

I keep trying to figure out mortgage payments in my head and getting it wrong because there's an exponential factor that's tough to approximate with guesswork. I wrote up an explanation of how to calculate your mortgage payment here, starting with the difference in how compound interest works depending on whether you're a lender or a borrower.

I've also been reading up on how the government looks at the cost of housing to the average American, and to the best of my understanding, they've settled on a cash flow basis as the best way to capture the effect of housing prices on the cost of living. Unfortunately, this maximizes the influence of both the monthly mortgage payment and the recent appreciation in housing costs. The way I read it, as housing prices roll over, the appreciation factor will turn negative and this will feed back into Fed funds rate by way of the CPI. The higher Fed funds rate will increase the mortgage payment for new buyers and those with adjustable mortgages, which will further depress house prices, increasing the negative appreciation and feeding back into higher interest rates.

Repeat as needed. The bottom line is I'm scared to buy now, I see no reason housing prices shouldn't retreat to 2003 levels.