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Tight credit, high rates and low inventory add to buyers’ affordability struggles 

It now takes 34.2% of the median household income to make P&I payments on the median-priced home: Black Knight

The affordability challenges homebuyers are facing are becoming more deeply entrenched, according to Black Knight‘s most recent monthly mortgage monitor report.

“In a sense, the gridlocked housing market has been feeding on itself,” Andy Walden, VP of enterprise research strategy at Black Knight, said. 

Tightening credit availability, elevated rates, inventory shortages and strengthening home prices are adding to affordability challenges, the report notes. In turn, the 100 largest U.S. markets are now less affordable than the long-term average. 

It now takes 34.2% of the median household income to make principal and interest (P&I) payments on the median-priced home purchased with 20% down and a 30-year fixed-rate mortgage.

One key contributor to the affordability challenges is dwindling inventory nationwide. Since the start of 2023, inventory has deteriorated in 95% of major markets, the report notes.

And, as rates have climbed, purchase activity has fallen, declining to a 34% deficit after pulling within 15% of pre-pandemic levels on mortgage rate dips earlier this year. Mortgage rates averaged 6.79% as of June 1, according to Freddie Mac, up 22 basis points from 6.57% the week prior. 

In addition, Optimal Blue rate lock data shows that average credit scores and down payments are on the rise, signaling a tightening credit atmosphere. This is compounding the challenges for potential home buyers and the origination market alike, Walden said. 

According to the report, purchase credit scores in April were the highest on record, dating back to 2000, when Black Knight first started tracking the metric.

And, the 0.46% seasonally adjusted rise in home prices in April was near the 30-year average of 0.48% for the month, which would reflect a 5.5% annualized growth rate if price gains continued at this pace, according to the report.

“While elevated interest rates continue to weigh on both affordability and demand, they’re simultaneously constricting supply as well as would-be sellers who locked in ultra-low rates early in the pandemic continue to sit on the sidelines. The combination of lower supply and demand in April led to both slowing sales and firming prices,” Walden said. 

Price strengthening nationwide this spring has erased more than 60% of the declines seen late last year, the report notes, and at the current rate of growth, it would fully erase those corrections by mid-2023.

At its current trajectory, the annual home price growth rate would fall only modestly below 0% for a very short time before pulling back above water by late second quarter and early third quarter of 2023, according to Black Knight.

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