The market showed no mercy toward potential homebuyers. As home price appreciation increased, affordability was on the decline.
Black Knight’s December 2016 Mortgage Monitor, released on February 6, saw that home prices were up 5.7 percent year-over-year as of November 2016, which makes 55 months of annual growth and the highest annual rate of appreciation in almost three years. The report also stated that home prices have increased every month in 2016 and if that trend continues, it will join the year 2013 as “the only two years since 2005 where home prices increased in each month throughout the year.”
With home price appreciation on ascending in December, the monitor found that borrowers were willing to pay more for the same home than they were prior to the mortgage rate decline. It now takes approximately 22.2 percent of median income to make the monthly principal and interest (P&I) payment on a median priced home.
Due to the fluctuating landscape of the housing market, affordability was always a wildcard for homebuyers. The Mortgage Monitor stated that the home affordability is under watch, despite homes being more affordable than “pre-bubble norms.”
“In light of the current interest rate environment and continued home price appreciation (HPA), Black Knight also returned to the subject of home affordability. Historically low interest rates had been helping to accelerate HPA, but that was prior to interest rates on 30-year mortgages rising by 75 basis points in November alone. With today’s prevailing 30-year conforming mortgage rate (4.19 percent as of Jan. 26, 2017) housing is now the least affordable it’s been since 2010, requiring 22.2 percent of the median income to make the monthly principal and interest (P&I) payment on the median- priced home. In total, the monthly P&I payment required to purchase the median-priced home increased 10 percent in Q4 2016 alone. Nationally, homes remain more affordable than pre-bubble “norms,” but it’s clear that the market is now experiencing the most pressure -- from an affordability perspective -- since the housing recovery began,” the report said.
The report also noticed that adjustable-rate mortgages (ARM) lending will see a boost in 2017. According to the November Mortgage Monitor , there were approximately 5.25 million active ARMs, with roughly one-fifth of those still in their initial fixed-rate term.
“A look at recent history shows that as rates rise, so does the ARM share of the market,” the report stated. In late 2013 and early 2014, rates were near 4.5 percent, and the share of ARMs “was twice what it is today, and last fall when rates were up near four percent it was over 60 percent higher than today. If this trend holds true and interest rates remain above 4 percent, it’s likely there will be a marked rise in ARM lending in 2017,” the report stated.