A “For Sale” sign outside a home in Louisville, Kentucky.
Lucas Sharrett | Mayor Bloomberg | fake images
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Mortgage rates just hit their highest level since 2009 and home prices continue to post double-digit gains. Now, almost every major housing market in the United States is less affordable than it has been historically, and affordability is near its worst point on record.
New calculations from Black Knight, a provider of mortgage data and technology, show that 95% of the 100 largest 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 gains eased slightly in March but were still up 19.9% year over year. Compared to February, prices rose 2.3%, the fifth time since the pandemic began when home prices rose more than 2% in a single month. Prices rose 5.9% in the first three months of the year. Consumers are grappling with rising prices in every category, from real estate to airline tickets to groceries.
The average rate on the popular 30-year fixed interest rate started this year at 3.29% and hit 5.55% on Monday, according to Mortgage News Daily. Rates could rise further after the Federal Reserve meeting on Wednesday, when markets will hear more about the Fed’s push to curb inflation.
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Home buying affordability hasn’t been this bad since July 2006, when rates hovered around 6.75%. Then, it took about 34% of median income to cover the monthly mortgage payment, including principal and interest, on a home purchased with a 20% down payment.
As of April 21, this payment-income ratio had reached 32.5%. Historically, a rate above 21% has caused the housing market to cool off, with the exception of the last two years. The pandemic has created an anomaly in the real estate market, because the demand is very high and the supply is very low.
If rates rose just 50 basis points more or home prices rose just 5% more, housing affordability would be the worst on record, according to Black Knight. (Of those two factors, the 5% increase in prices would be more likely.)
It is often said in the real estate market that consumers do not buy the price of the house, they buy the monthly payment. That payout is at a new high, up $552 (a 38% increase) so far this year to $1,809, and up $790 (or 72%) since the start of the pandemic.
In reaction to weaker affordability, consumers are suddenly turning to adjustable-rate mortgages, which offer a lower interest rate. ARM’s share of prospective homebuyers’ fixed rates rose from 2.5% in December to almost 8% in March, according to Black Knight. As of last week, that share was more than 9%, according to the Mortgage Bankers Association.
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