Despite rising prices, home affordability hits two-year high

Despite the acceleration of home-price growth, home affordability across the nation is the best it has been since early 2018, according to a December 2019 report from Black Knight.

According to Black Knight, it now requires 20.6% of the U.S. median monthly income to make the monthly principal and interest payment on a median-priced home — the smallest payment-to-income ratio in two years. Year over year, buying power has increased 16%. With the same principal and interest payment, prospective homebuyers can now purchase a home that’s $48,000 more expensive compared to one year earlier. 

Consider that, despite the price of the average home growing by almost $13,000 in a little more than a year, the monthly mortgage payment required to buy that same home has fallen by 10% over the same time frame. What’s keeping affordability so high? Low mortgage rates, which continue to outweigh rising home prices in maintaining affordability levels.

Note that payment-to-income ratios still vary widely in terms of geography. The Midwest region, for example, teems with affordability and boasts seven of the 10 metros with the lowest payment-to-income ratios — Cleveland; Cincinnati; Detroit; Kansas City, Missouri; St. Louis; Indianapolis; and Columbus, Ohio. In each of these cities, it requires less than 15% of the median income to purchase an average-priced home.

On the other end of the spectrum, however, is California. Although affordability there has improved, a buyer still needs more income to make the monthly mortgage payments on an average-priced home today than they did from 1995 to 2003. In San Jose, falling prices and low rates have lessened the payment-to-income ratio from 48% in mid-2018 to 38% now, and it still remains one of the least affordable U.S. markets. Only Los Angeles, at 43.4%, has a higher payment-to-income ratio. And of the 10 metros with the highest payment-to-income ratios, six are in the Golden State.

Black Knight’s data also suggests that even though today’s potential buyers may be wielding increased purchase power, amplified affordability will turn up the heat on home prices across the country. 

“After falling from nearly 7% year-over-year appreciation in early 2018 to a trough of 3.8% in August 2019, the national home-price growth rate gained a good deal of steam as mortgage interest rates declined throughout the second half of last year,” said Ben Graboske, data and analytics president at Black Knight. “In fact, December marked four consecutive months of home-price growth acceleration and the largest single-month acceleration in more than 6.5 years, while the annual rate of appreciation saw nearly a full percentage-point increase over the last four months of 2019.”

And with increased affordability luring more first-time buyers into competition, the low end of the housing market has seen strong price growth. According to Graboske, homes in the bottom 20% of the price pool saw 6.6% annual growth in 2019 — three times the rate of homes priced among the top 20%. This is not to say, however, that expensive homes haven’t also seen price growth. In response to declining rates, the annual growth rate in the top price tier has ballooned from 0.7% annually in August 2019 to 2.3% this past December.

Prospective homebuyers, it seems, should enjoy the affordability while it lasts. If historical trends prove true, 2020 could be a year of burgeoning price growth.

“Recent history at comparable levels of affordability suggest acceleration in home-price growth may well continue in the coming months as this increased buying power puts upward pressure on home prices across the country,” Graboske said.



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