The last time houses were this unaffordable was 2006

Inman News

If mortgage rates rise by another half a percentage point — or if home prices go up another 5% — affordability will hit the worst levels on record, Black Knight warned on Monday.

With soaring home prices and mortgage rates pushing affordability to levels not seen since the 2006 housing bubble, borrowers are increasingly turning to adjustable-rate mortgages or paying “points” to buy down their interest rate, according to numbers released Monday by mortgage data and technology provider Black Knight.

In its latest monthly Mortgage Monitor report, Black Knight warned that if mortgage rates rise by another half a percentage point — or if home prices go up another 5 percent — affordability will hit the worst levels on record. About one-third of housing markets are already there.

The best measure of affordability is payment-to-income ratio (PMI) — the share of median income a homebuyer putting 20 percent down on the average priced home needs to set aside to make their monthly mortgage payment.

Source: Black Knight Mortgage Monitor.

In July 2006 — on the eve of the housing crash and 2007-09 recession — national PMI hit an all-time high of 34.1 percent. With home prices up 19.9 percent from a year ago in March, and mortgage rates well above 5 percent, PMI hit 32.5 percent as of April 21, Black Knight said.

In “kitchen table” terms, the average mortgage payment is up 38 percent this year alone, to $1,884, a 72 percent increase from the start of the pandemic, said Black Knight Data & Analytics President Ben Graboske in a statement.

While those are national statistics, Black Knight says 95 percent of the 100 largest U.S. markets are now less affordable than their long-term (1995-2003) benchmarks, compared to 6 percent at the start of the pandemic.

Black Knight data shows 37 markets that represent nearly a third of the country are now the least affordable they’ve ever been.

To cope with rising interest rates a growing proportion of borrowers are turning to adjustable-rate mortgage (ARM) loans, or paying “points” to get a lower rate.

Not only do ARM loans have a lower introductory rate than fixed-rate loans, but those introductory rates haven’t increased as much as rates on fixed-rate loans.

While rates on 30-year fixed rate mortgages are up by 2 full percentage points in the first 4 months of 2022, the introductory rate on 5/1 ARMs rose 1.37 percentage points during the same period. That means the difference, or “spread” between fixed-rate and ARM loans was 1.33 percentage points in late April — the widest it’s been since 2014.