A “For Sale” sign outside a home in Louisville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images
Mortgage rates just hit their highest level since 2009 and house prices continue to rise at double digits. Now almost all major housing markets in the United States are less affordable than in the past, and affordability is near its worst point ever.
New calculations from Black Knight, a mortgage technology and data provider, show that 95% of the top 100 US housing markets are less affordable than their long-term levels. That figure was 6% at the start of the Covid pandemic. Thirty-seven markets are less affordable than ever.
House price growth slowed slightly in March, but still rose 19.9% year on year. Compared to February, prices rose 2.3%, the fifth time since the start of the pandemic, when house prices rose more than 2% in one month. Prices rose by 5.9% in the first three months of the year. Consumers struggle with rising prices in a variety of categories, from real estate to airline tickets to groceries.
The average interest rate on the popular 30-year fixed rate started this year at 3.29% and reached 5.55% Monday, according to Mortgage News Daily. Interest rates could rise even higher after Wednesday’s Federal Reserve meeting, when markets will receive more commentary on the Fed’s efforts to curb inflation.
The affordability of buying a home hasn’t been this bad since July 2006, when rates were around 6.75%. It then took about 34% of median income to cover the monthly mortgage payment, including principal and interest, for a home purchased with a 20% down payment.
By April 21, that pay-to-income ratio had reached 32.5%. Historically, a ratio above 21% has caused the housing market to cool, with the exception of the past two years. The pandemic has created an anomaly in the housing market as demand is so high and supply is so low.
If interest rates rose just 50 basis points more or house prices rose just 5% more, home affordability would be the worst ever, according to Black Knight. (Of those two factors, the 5% price hike would be more likely.)
It is often said in the housing market that consumers do not buy the house price, but the monthly amount. That payment is at a new high, up $552 (up 38%) so far to $1,809, and up $790 (or 72%) since the start of the pandemic.
In response to weaker affordability, consumers are suddenly switching to floating rate mortgages, which offer lower interest rates. According to Black Knight, the ARM share of interest rate commitments from potential home buyers rose from 2.5% in December to nearly 8% in March. According to the Association of Mortgage Banks, that share was over 9% last week.