Lending Real Estate

Black Knight: Will homebuying become unaffordable in two years?

Or maybe even less

Hawaii

With the right economic conditions, in two years, home affordability could get close to the same level seen before the financial crisis, making it difficult for people to afford a home.

Black Knight Financial Services’ most recent Mortgage Monitor Report, which is based on data as of the end of December 2015, said that home prices have increased year-over-year for 43 consecutive months.

As a result, Black Knight revisited the question of home affordability in its new report.

In today’s current market, the report found that homes are still more affordable than they were in the pre-bubble years, with it taking 21% of the national median income to pay the mortgage on a median priced home.

The report helped put this in perspective by noting that this is 20% less than the 26% average payment-to-income ratio seen back in 2000-2002, and significantly less than the 33% at the top of the market in 2006.

However, if this trend were to continue, especially given that home prices have increased year-over-year for 43 consecutive months, this could all change in two years.

Black Knight looked ahead using an example scenario where today's 5.5% annual home price appreciation continues, and interest rates rise 50 basis points a year.

The most recent weekly mortgage application survey from the Mortgage Bankers Association reported that the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) reached its lowest level since October 2015, dropping to 4.02%, from 4.06%.

And at the beginning of the year, Fitch Ratings said in a report that it expects mortgage rates to rise by between 25-50 basis points by the end of 2016.

Using this data, Black Knight Data and Analytics Senior Vice President Ben Graboske said, “We see that in two years home affordability will be pushing the upper bounds of that pre-bubble average.”

“At the state level under that same scenario, eight states would be less affordable than 2000-2002 levels within 12 months and 22 states would be within 24 months,” said Graboske.

Within 12 months the average mortgage payment will have risen by $114, requiring 24% of monthly income. However, the report said this is still below 2000-2002 levels.

But by the end of 2017, the report said that the monthly mortgage payment would be $240 more, requiring 26.5% of household income, pushing the upper boundaries of pre-bubble averages.

“At the state level under that same scenario, eight states would be less affordable than 2000-2002 levels within 12 months and 22 states would be within 24 months,” said Graboske.

Although both Hawaii and Washington D.C. are already less affordable than they were during the pre-bubble era, other states, like Michigan, would still be affordable even after 24 months under this scenario. 

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