Housing is the least affordable it’s been since late 2018, according to the latest Mortgage Monitor Report from Black Knight.
The analytics company’s figures put April’s annual home price growth rate at 14.8%, highest since Black Knight began tracking the metric in the mid-1990s. April’s yearly gain marks 17 consecutive months of home price increases, with the growth rate seeing a stark upturn in recent months as stiff competition over low supply keeps pushing prices skyward.
“Driving this growth are two key elements: historically low interest rates and – more acutely – the lack of available for-sale inventory,” said Ben Graboske, data & analytics president for Black Knight. “The total number of active listings was down 60% from the 2017 to 2019 average for April. It’s not getting any better, either. Data from our Collateral Analytics group showed there was two months’ worth of single-family inventory nationwide in March, the lowest share on record and trending downward. In fact, there were 26% fewer newly listed properties in April as compared to pre-pandemic seasonal levels.
“Of course, such aggressive home price growth has had an impact on affordability levels, even with interest rates back under 3% and within roughly a quarter point of historic lows,” Graboske continued. “Entering June, the share of the median income needed to make the monthly payments on the median-priced home had risen to 20.5%. While still more affordable than the 25-year average of 23.6%, housing has surpassed its 5-year average of 20.1% even with interest rates back below 3%.”
In recent years, Graboske explained, a 20.5% payment-to-income ratio has been the approximate “tipping point” at which home price appreciation begins to slow. Given the magnitude and persistence of the current ongoing inventory shortage, however, home prices have so far continued to rise rapidly even as affordability continues to erode.
At the current growth rate of home prices, the national payment-to-income ratio would hit 21.9% if 30-year mortgage rates rose to 3.5%. A mortgage rate of 4% would take the payment-to-income ratio to 23.2%, while a 30-year rate of 4.5% — still generally low by historical standards — would push it to 24.7%. Should prices rise at their current pace and 30-year rates slowly rise to 3.5% by the end of 2022, the national payment-to-income ratio would grow to 21.6% by the end of this year and 25.0% by 2022.
Even if home prices rose at their present pace and 30-year rates rose to 4.5% by the end of next year, it would drive the payment-to-income ratio to 22.5% by the end of this year and above 28% by year end next year.
All of this suggests that, even if rates stay low over the next year and a half, the current rate of home price growth isn’t sustainable. Of course, rising rates and shrinking affordability may ultimately end up decelerating home price growth soon. For now, however, it seems that the historical correlation between affordability and price growth doesn’t mean much in the current market.