How much will rising mortgage interest rates impact home affordability in 2018?
A recent analysis from Black Knight shows that rising rates will particularly impact affordability for lower-priced properties – mainly because lower-priced properties have been appreciating at a much faster pace compared with mid- to high-priced properties, and wage growth is not keeping pace.
“Prices on Tier 1 properties – those in the lowest 20 percent of home values – have been appreciating at a faster rate than all other tiers for 67 consecutive months,” says Ben Graboske, executive vice president of Black Knight’s data and analytics division, in the firm’s most recent Mortgage Monitor report. “The annual rate of appreciation for these homes is 1.9 percent higher than the market average and more than 3.6 percent higher than that of properties in the top 20 percent of prices (Tier 5).”
Meanwhile, wage growth for folks who might purchase lower-priced homes is basically stuck in neutral. According to U.S. Census Bureau data, income growth in the lower quintiles has not kept up with the higher ends of the market, Graboske says.
“This has clear implications for home affordability in this segment of the population, even more so in light of the 43-basis-point increase in interest rates seen in just the first six weeks of 2018,” he says. “It seems evident that further affordability reductions from rising interest rates could put more pressure on lower-income buyers by increasing competition for lower-priced homes, as borrowers’ overall buying power is diminished.”
Still, Graboske says overall affordability “remains better than long-term historical averages, even taking the recent rate jump into consideration.”
“Currently, it takes 23 percent of the median income to purchase the median home nationally, which is still 1.9 percent below the averages seen from 1995-2003,” he says.
Meanwhile, as is to be expected, rising interest rates are dis-incentivizing borrowers from refinancing. According to the report, the recent spike in 30-year fixed mortgage interest rates “had the effect of cutting the population of borrowers with interest rate incentive to refinance by nearly 40 percent in 40 days.”
“Approximately 1.4 million borrowers lost the interest rate incentive to refinance in just the first six weeks of 2018,” according to the report. “This leaves 2.65 million potential candidates who could still both benefit from and likely qualify for a refinance at today’s rates, the smallest that population has been since late 2008, prior to the initial decline in rates during the recession.
“This represents another challenge to a consistently shrinking refinance market. Refinance lending declined significantly in 2017, with the total number of originations down 29 percent, and total volume down by $355 billion, a 34 percent year-over-year decline.”