Home affordability improved slightly in December, due mainly to lower mortgage rates, stabilizing home prices and increased inventory.
According to ICE Mortgage Technology’s Mortgage Monitor report, the share of income required to purchase the median home fell nearly 5 percentage points in December – down from October’s 28-year high.
The national inventory deficit also improved for the seventh consecutive month which, along with improved affordability, points to a better housing market environment in coming months.
In addition, home price growth is expected to further slow in coming months, which should give prospective buyers a boost.
“Prospective homebuyers may feel an all-too-familiar sense of dread upon hearing that prices – already at record highs – rose another 5.6 percent in 2023 according to our ICE Home Price Index,” says Andy Walden, vice president of enterprise research strategy for ICE, in the report.
“As always, the truth of the situation is more nuanced than one simple, backward-looking metric might suggest, and the data holds some encouraging signals for these folks. In recent months, we’ve seen improvement in rates, affordability, and for sale inventory, with monthly home price growth moderating on a seasonally adjusted basis. While we are still out of sync with historical norms on multiple fronts, each of those metrics have at least been moving in the right direction.”
Lower interest rates have also begun to increase refinance incentive, albeit slowly.
“While the mortgage market remains overwhelmingly purchase-centric, refinance incentive is rising, albeit slowly, alongside easing interest rates,” Walden says. “Since interest rates peaked back in October, we’ve seen a threefold increase in the number of mortgage holders who could reduce their first lien rate by at least 75 bps with a rate/term refi. And while that population stands at roughly 1.7 million – up from 520,000 last fall – it is still a historically small number.”
Should mortgage rates fall to 6% by the end of 2024, as current forecasts suggest, the number of borrowers with refinance incentive would rise, particularly among 2023 vintage originations, Walden says.
“Under that scenario – a potential needle mover for the refinance market – some 46 percent of 2023-vintage borrowers would be ‘in the money,’ with nearly a third able to cut a full percentage point off their current rates,” he says. “As more legacy mortgages regain rate incentive as well, the overall ‘in the money’ population would more than double to 3.8 million by the end of the year, with nearly 60 percent of that growth coming from loans originated in 2023.
“Originators would do well to identify and engage with these potential customers now,” he adds. “Of course, what’s good news for mortgage originators simultaneously heightens prepayment risk in the capital markets. Getting a granular, daily view of prepay activity will become essential this year as investors navigate an extremely rate-sensitive and volatile market.”
Mortgage holders are also, on average, in a much better position to borrow against their homes, as home equity has increased substantially during the past year.
Mortgage holders gained $1.6 trillion in equity in 2023 to reach an aggregate $16 trillion, the highest year-end total on record, two thirds of which is held by borrowers with credit scores of 760 or higher, ICE says in the report.
The average mortgage holder now has $299,000 in equity, $193,000 of which is “tappable” and could be withdrawn while still maintaining a healthy 20% equity stake.
Photo: Tierra Mallorca