Loan interest

Mortgage rates rise as home affordability nears record low

A “For Sale” sign in front of a house in Louisville, Kentucky.

Luke Sharret | Bloomberg | Getty Images

Mortgage rates have just reached their highest level since 2009, and house prices continue to post double-digit gains. Now nearly 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 technology and data, show that 95% of the 100 largest housing markets in the United States are less affordable than their long-term levels. This figure was 6% at the start of the pandemic. Thirty-seven markets are less affordable than they have ever been.

House price gains retreated slightly in March, but were still up 19.9% ​​year over 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 a single month. Prices are up 5.9% over 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 for the popular 30-year fixed rate started this year at 3.29% and hit 5.55% on Monday, according to Mortgage News Daily. Rates could rise further after Wednesday’s Federal Reserve meeting, when markets receive more commentary on the Fed’s willingness to rein in inflation.

Home affordability hasn’t been this bad since July 2006, when rates were around 6.75%. Then, it took about 34% of median income to cover the monthly mortgage payment, including principal and interest, for a house purchased with a 20% down payment.

As of April 21, this payment-to-income ratio had reached 32.5%. Historically, a ratio above 21% has caused the housing market to cool, with the exception of the last two years. The pandemic has created an anomaly in the housing market because the demand is so high and the supply so low.

If rates were to rise just 50 basis points more or if house prices rose just 5% more, home affordability would be the worst on record, according to Black Knight. (Of these two factors, the 5% price increase would be more likely.)

It is often said in the housing market that consumers do not buy the price of the house, they buy the monthly payment. That payout hit a new high, up $552 (a 38% increase) year-to-date to $1,809, and up $790 (or 72%) since the start of the pandemic. .

In response to lower affordability, consumers are suddenly turning to variable rate mortgages, which offer a lower interest rate. ARM’s share of potential buyers’ rate locks rose from 2.5% in December to nearly 8% in March, according to Black Knight. Last week, that share was over 9%, according to the Mortgage Bankers Association.