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The ‘Balancing Act’ Between Low Interest Rates and Home Prices

A "pretty amazing balancing act" between low interest rates and rising home prices is reportedly keeping affordability stable at the national level, according to the Black Knight Mortgage Monitor for September 2016 released on Monday.

The report found that the average U.S. home value increased by $13,500 from the year prior, but low interest rates mean the monthly P&I payment on the median-priced home is only a dollar less than last year. Additionally, it currently takes only 20 percent of the median monthly income to cover monthly payments on the median-priced home. This is well below historical norms.

Despite these national levels, affordability varies across the country based on home price appreciation (HPA). For example, the report shows that in Washington and Oregon, it costs 5-6 percent more in P&I each month to buy the median priced home than the year before. In contrast, states such as New Jersey, Wyoming, North Dakota, and Connecticut cost 3 to 5 percent less each month than in the previous year.

If the rates where to increase, this would disrupt the balance that affordability is seeing nationally. The report computes that a 50-basis point increase in interest rates would be equivalent to a $17,000 increase in the average home price, thus potentially bringing the affordability ratio up to 21.5 percent of median income. That would make affordability the highest it's been post-crisis. With a 1 percent rise in rates, the payment-to-income ratio would potentially increase to 23 percent, the equivalent of increasing the cost of the average home by $34,000.

Additionally, there are about 17 times as many originations right at the conforming limit as compared to preceding dollar amount buckets, approximately 100,000 over the past 12 months, according to Black Knight. Origination volumes drop off by about 70 percent just above the limit and GSE loans originated right at the conforming limit are 9 times more likely to carry a 2nd lien than those that are not.

Click here to view the complete Mortgage Monitor for September.

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