Lower Mortgage Rates, Slowing Home Price Gains Boost Affordability

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Affordability is improving, due mainly to lower mortgage rates and slowing home price appreciation, according to Black Knight.

In March, a month that typically sees the largest home price gains of the year, prices increased just 1%, marking 13 consecutive months of slowing home price appreciation, according to the firm’s home price index.

What’s more, the annual rate of appreciation had slipped to 3.8%.

“As we’ve been reporting, home prices began to decelerate in February 2018 as rising interest rates started putting pressure on affordability,” says Ben Graboske, president of Black Knight’s data and analytics division, in the firm’s recent Mortgage Monitor report. “The situation intensified in the last half of the year as 30-year fixed rates peaked near five percent in November, bringing affordability levels close to their long-term averages.

“Of course, rates have since declined and are now hovering close to four percent,” Graboske says. “However, they didn’t fall below 4.25 percent until the last week of March, meaning we likely won’t see the impact – if any – on home prices until May or June housing numbers.”

The recent decrease in mortgage rates, however, has already had a positive impact on affordability. 

“In fact, the monthly payment needed to purchase the average-priced home with a 20 percent down payment has declined by six percent in the last six months,” Graboske says. “It currently requires $1,173 per month to make that purchase, the lowest such payment in more than a year.

“When we factor income into the equation, we see that it takes 22 percent of the median income to purchase the average-priced home,” he adds. “That’s the lowest payment-to-income ratio in more than a year as well, and far below the long-term average of 25.1 percent.

“That the market reacted in terms of slowing home price growth even before we hit that long-term average suggests that a 25 percent payment-to-income ratio may not be sustainable in today’s market, whether due to excess non-mortgage related debt, lending standards or other factors.”

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