Lack of Wage Growth, Rising Home Prices Driving Down Affordability

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Wage growth is not keeping pace with home price appreciation, which, combined with rising interest rates, is creating a scenario in which “affordability is unsustainable,” according to Black Knight’s most recent Mortgage Monitor report.

As Ben Graboske, executive vice president of Black Knight’s data and analytics division, explains, even though income growth in the U.S. has been better than average over the last few years, it has not been enough to keep up with rising home prices and interest rates.

“Last month, we reported that January and February 2018 saw faster rates of monthly home price appreciation than the start of any year since 2005,” Graboske says. “While the pace of annual home price growth slowed a bit in March, home price appreciation is still around 6.5 percent. We’ve also seen interest rates climb by nearly three-quarters of a percent so far this year. Together, those two factors have resulted in a $150 increase in the monthly payment on a 30-year mortgage used to purchase the median-priced U.S. home, about a 14 percent rise since the start of 2018.”

As a result, “Seven states are now less affordable than their long-term norms and another 12 are close to hitting that point,” Graboske says.

“Though much of the country remains more affordable than long-term norms, the current trajectory would change that sooner rather than later,” he says. “We’ve modeled out multiple economic scenarios, some more conservative than others, and even with historically strong income growth, the current combination of home price and interest rate increases isn’t sustainable.”

Should home price appreciation continue at its current pace – and should interest rates increase at a rate of half a percentage point per year – it “would push affordability to an all-time low by 2023,” Graboske says.

“However, many analysts expect home price appreciation to slow, and March’s slight downward shift in annual home price appreciation may already suggest some degree of reaction to tightening affordability,” he says. “So for our second scenario, we used the 25-year average of 3.75 percent home price appreciation, but kept everything else the same. Under that scenario we hit long-term affordability levels in two years, and in five years, purchasing the median-priced home would require 30 percent of median income.

“It’s only when we slow home price appreciation to that 25-year average, while also reducing rate increases to just a quarter of a percentage point a year, that we land on a more sustainable scenario, hitting long-term affordability norms at the five-year mark,” he adds.

Currently, Washington D.C. requires the largest share of median income (40%) to purchase the median-priced home, followed by California (38%), Hawaii (35%) and Maine (33%).

Wyoming, Oregon and New York are also near the top, with payment-to-income ratios of 29%. In total, 14 states have payment-to-income ratios above the national average of 23%.

Meanwhile, mortgage loan performance continues to improve. According to Black Knight’s most recent First Look report, the total U.S. mortgage delinquency rate, as of the end of April, was 3.67%, a decrease of 1.60% compared with March and down 10.17% compared with April 2017.

The foreclosure pre-sale inventory rate also hit a new low at 0.61%, a decrease of 2.26% compared with the previous month and down 28.41% compared with a year earlier.

There were about 49,300 foreclosure starts in April, a decrease of 5.37% compared with March and down 6.63% compared with April 2017.

The monthly prepayment rate in April was 0.84%, down 4.29% compared with the previous month and down 2.64% compared with a year earlier.

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