Rates surged last week as the 30-year fixed rate mortgage rose more than half a percentage point – the largest one-week increase since 1987, according to Freddie Mac. That, combined with continuing increases in home prices, pushed home affordability to its lowest level in more than 35 years.
It now requires $2,103, or 36.2% of the median household income, to make the principal and interest (P&I) payment on the average-priced home with 20% down. Housing payments are higher, as a percentage of income, than the previous peak of 34.1% in July 2006 and well-above the long-term average of 25.1%.
Of the nation’s 100 largest markets, 72 are now the least affordable they’ve been since we started collecting the data back in 1995. The last time affordability was this low, in the mid-1980s, 30-year rates were at 12.9%. The average home price was equal to 3.5 years of median household income. In today’s environment, which relies more heavily on low interest rates, average home prices now equate to 6.4 years of median household income. This increase in prices has been driven, in large part, by nationwide inventory shortages.
Home prices are up 8.7% through the first four months of 2022. That’s an increase of almost 20% year over year. Prices have been on a historic run, increasing 42% since the start of the pandemic. The latest data shows continuing strength, albeit with growing signs of moderation.
The market appears to be at an inflection point. Higher interest rates are already putting increased pressure on homebuyers with Black Knight’s Optimal Blue data showing a pullback in purchase mortgage demand in early June. Home price growth has begun to moderate; however, the full impact of recent rate increases isn’t likely to be seen until late summer and into the fall. At the same time, tight inventory – which has begun to see modest improvements in recent months — continues to put upward pressure on prices. We will continue to watch these trends and report on them as they develop.