Rising Interest Rates, Prices Pose Threat To Home Affordability

Home affordability is still better than it was in the pre-crisis years – but it won’t be for much longer if home prices keep rising and mortgage interest rates begin to increase, Black Knight’s Mortgage Monitor report for December shows.

According to the firm’s data, the mortgage payment-to-income ratio is still favorable by historical standards. As of December, a buyer with a median income would need about 21% of that income in order to purchase a median-priced home using a 30-year mortgage. Compare that with 2006, when a buyer would need to use about 33% of his income in order to buy a median-priced home.

However, as Ben Graboske, senior vice president of data and analytics for Black Knight, explains, home affordability could easily be eroded by rising interest rates and rising home prices.

“When we look at an example scenario using today’s rate of home price appreciation and a 50-basis-point-per-year increase in interest rates, we see that in two years home affordability will be pushing the upper bounds of that pre-bubble average,” Graboske explains in the report. “At the state level, under that same scenario, eight states would be less affordable than 2000-2002 levels within 12 months and 22 states would be within 24 months.

“Right now, both Hawaii and Washington, D.C. are already less affordable than they were during the pre-bubble era,” he adds. “On the other hand, even after 24 months under this scenario, Michigan – among other states – would still be much more affordable at the end of 2017 than it was in the early 2000s.”

To check out the full report, click here.


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