Housing Affordability Nears the Worst on Record

Housing affordability is approaching a record low as mortgage rates rise, according to a new analysis.

The share of the median income required to make the principal and interest payment on an average-priced home is now 32.5%, analytics company Black Knight said in its monthly “Mortgage Monitor” report on Monday, within striking distance of the previous record of 34.1% set in July 2006, at the peak of the housing bubble.

Black Knight began tracking the affordability data in 1996, so its records don’t factor in the explosion in mortgage rates during the early 1980s.

Black Knight President Ben Graboske said it won’t take much to push unaffordability levels beyond the 2006 record, noting that a jump of 50 basis points in 30-year offerings would likely do so.

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Mortgage rates have increased dramatically in the last few months as the Federal Reserve conducted the first hike of its interest rate target in years and prepares to take even more aggressive action to tamp down inflation, including an almost-certain half percentage point hike this week — the first time the Fed has taken such a heavy hand in jacking up interest rates in more than two decades.

As of Wednesday, the average 30-year fixed-rate mortgage was 5.55%, up more than 2 percentage points from just a year before. The higher rates are the leading factor in making U.S. housing less affordable.

Home prices rose 3% in March, the fifth time since the pandemic that housing prices increased by more than 2% in just a single month, according to Black Knight. On an annual basis, home prices increased by a mammoth 19.9%, slightly less than the record 20.1% notched for the 12 months ending in February.

“After accelerating for the last four months, the rate of annual home price growth actually slowed a bit in March,” Graboske said.

“Year-to-date, home prices are already up nearly 6% nationwide, with nearly 25% of the nation’s largest markets seeing gains of more than 7% over the last three months alone,” he added. “With 30-year interest rates hitting 5.11% as of April 21, the impact these price gains have had on home affordability is significant.”

The sharp increases in mortgage rates are causing some buyers to flee the market.

Housing purchases declined 2.7% from February to a seasonally adjusted annual rate of 5.77 million in March, and year-over-year sales fell 4.5%, according to a recent report by the National Association of Realtors. That marked the second month in a row of tumbling sales.

Prior to mortgage rates creeping up to the levels they are now, there was a glut of demand from homebuyers who knew that the Fed would be increasing interest rates and were trying to lock in the lower mortgage rates before they increased too much.

Lawrence Yun, NAR’s chief economist, has predicted that home purchases will decline by about 10% this year as the Fed continues hiking its interest rate target.

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“Home prices have consistently moved upward as supply remains tight,” Yun said. “However, sellers should not expect the easy-profit gains and should look for multiple offers to fade as demand continues to subside.”

While housing is becoming increasingly unaffordable, just about everything else is, too, further causing financial strain for homebuyers. Consumer prices increased 8.5% for the 12 months ending in March — the last time that inflation was up that much was November of 1981.