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Q&A: Black Knight's Walden discusses affordability outlook

Real estate analytics company Black Knight recently released its Mortgage Monitor for January 2019, revealing improved affordability due to falling interest rates and slowing home-price growth. It’s welcome news as the market enters the spring homebuying season. What is the outlook for buyers in the coming months? Scotsman Guide News spoke to Andy Walden, director of research for Black Knight, to find out.

AndyWaldenIs the biggest takeaway from the recent release of the Mortgage Monitor the continued growth of affordability for buyers?

Yes, that’s exactly right, and there were a couple of different things going on. One of them is that interest rates are obviously pulling back, which is good news for homebuyers, especially entering the homebuying season this year. It significantly improves their buying power when they're entering the market here. There’s a couple of different ways to look at it: Either they’re increasing their buying power by roughly 6 percent, or it will save them a significant amount of money while still looking at the same home in the market. That being said, we continue to see home-price growth kind of slowed down across the country as well, so [there are] a couple of different factors playing out in the market.

Could you describe how good this news is for homebuyers this year, compared to recent years?

It's roughly equivalent to where we were entering the homebuying season a year ago. But the pressure had really been put on the market from an affordability perspective late in 2018 when interest rates were up nearing 5 percent. Now, they've significantly pulled back. And if you look at the power that interest rates have on the market, essentially a 1 percent movement in interest rates is equivalent to 12 percent movement in home prices. So, the half a percent pullback that we've seen in interest rates over the last three months or so, it's been equivalent to a 6 percent downward movement in home prices. It has really opened up the doors for homebuyers entering this year.

According to your report, price appreciation appears to be slowing, especially in many high-demand metro areas. Are we seeing some relief for buyers in these markets, or is it too early to tell?

I think the reason that you're seeing that slowing is because affordability is tighter in those areas of the market. When you look out at, on the western coast — especially San Francisco, San Jose, Seattle, those types of markets — the reason that you're seeing slowing is because affordability is so tight in those areas. So, it's not necessarily good news for homebuyers in those specific areas. They’re still tight from an affordability standpoint. It's really when you get into the Midwestern regions of the country where you're seeing affordability that’s more favorable to long-term averages, I would say.

Do you think the price-growth deceleration in large, coastal metros might be a sign of more sustainable affordability in the near future?

That's really what we're trying to figure out right now. We can certainly see this flowing take place out there when we calculate affordability averages. They are still less favorable than long-term norms out in California (for example). That's really what we're trying to feel out in the market here throughout 2019. [California prices] were at a 10 percent growth rate. Down to roughly 3 percent is where we're sitting here entering 2019. Where does it go from here? Does it continue to slow a little bit? Do we some see some of those pockets of California go negative for the short term? That's really what we're trying to understand through some of the research we're doing here early on in 2019.

Is the affordability gap between places like the Midwest and California increasing or decreasing?

It’s still pretty significant, still similar to where it was entering [this] year. If you look at kind of the national picture, it takes a little over 20 percent of the median income to buy the average home nationally. In California, it’s 36 percent. It's almost 50 percent more of your gross take-home pay out there that it takes to buy that average home. That gap has been in that 14 [percentage-point] range for a significant amount of time. That's really always the case out there in California — it’s always one of the least-affordable places to live. But really, when you benchmark each area against itself, you can see [how prices have risen]. Even when you benchmark California against itself, it is still unaffordable compared to where it was before the financial crisis.

Can we extrapolate from these trends when and if price growth will even out?

I think a lot of that's dependent on what we see from the interest rate market, just because of how impactful interest rates are in that homebuying process. Typically, what you'd like to see is home-price growth level out with income growth over the long run, right? If you look at the 25-year average for home-price growth, it’s typically about 3.5 to 4 percent. We're still at a little over 4.5 percent right now, so we could still see three-quarters of a percent of slowing and kind of get in that long-term norm price range. But really, we've been in recovery mode for the last six years, and I think the market here in 2019 is kind of trying to find that equilibrium.

Is there a way to hit that sustainable equilibrium without plunging into a full-on slowdown?

Yeah, I think there certainly is. If you look at where interest rates are at right now in the market, if you saw home-price growth flatten out and level out with what we're seeing as far as income growth in that 3 to 4 percent range, I think that that is certainly sustainable. Now, if you start to see interest rates rise significantly and get up [near] 5.5 percent, then obviously that changes the equation when you look at home-price growth a little bit. But, if we see kind of a flat interest-rate run moving forward, then there's certainly room for both home-price growth and income growth taking place at the same time.




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