A triple threat for the United States housing market this spring is being built up by still-moderate income growth, rising mortgage rates and bigger jumps in home prices.
The ingredients for a reversal are not there anytime soon as home affordability fell to the lowest level in seven years at the end of 2016.
According to a new report from Black Knight Financial Services, which based the measure on borrowers using a 30-year fixed mortgage, to make the monthly principal and interest payment on the median priced home, it now takes 22.2 percent of median income. Thanks to a sharp jump in mortgage rates following the U.S. presidential election, that monthly payment on the median-priced home increased 10 percent in the fourth quarter alone.
As home prices and mortgage rates were higher, it took nearly 36 percent of the median income to afford a home during the 2005-2006 housing bubble.
But between those days and today, there is a stark difference. 30-year fixed loans were not being used by most homebuyers back then. With no money down and extremely low teaser rates, they were using all kinds of "creative" loan products. Adding to the balance of the loan, they also used negative amortization loans, which put payments off. The ensuing crash in the financial markets — precisely why many of these loans are illegal today, as these loans caused the extreme bubble.
"That's why we always use a 30-year fixed rate for comparison. It lets you know if something in the mortgage market itself (other than rates) is causing a change in the affordability equilibrium," noted Ben Graboske, executive vice president of Black Knight Data & Analytics. "Mortgage lending led to affordability getting out of whack back in 2006 due to mortgage programs increasing buying power and thus driving up home price when in reality, without those products, the affordability ratio (between home prices, incomes and interest rates) were nowhere near sustainable."
With the annual gains increasing each month, home prices rose steadily throughout last year. According to a new report from CoreLogic, prices were 7.2 percent higher nationally compared from December 2015, in December.
"As of the end of 2016, the CoreLogic national index was 3.9 percent below the peak reached in April 2006," said Frank Nothaft, chief economist for CoreLogic. "We expect our national index to rise 4.7 percent during 2017, which would put homes prices at a new nominal peak before the end of this year."
Certain local markets in California, Colorado and Texas have already moved well past the heights of the last housing boom and other indexes have shown home prices already surpassing their previous peak nationally. Low mortgage rates are no longer the main reason for higher prices. Tight supply and rising demand is the reason. As the leading edge of the massive millennial generation finally starts shopping for homes and as builders increase production only minimally, this spring could be the tightest market ever for homebuyers.
"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," Graboske said.
(Source:www.cnbc.com)
The ingredients for a reversal are not there anytime soon as home affordability fell to the lowest level in seven years at the end of 2016.
According to a new report from Black Knight Financial Services, which based the measure on borrowers using a 30-year fixed mortgage, to make the monthly principal and interest payment on the median priced home, it now takes 22.2 percent of median income. Thanks to a sharp jump in mortgage rates following the U.S. presidential election, that monthly payment on the median-priced home increased 10 percent in the fourth quarter alone.
As home prices and mortgage rates were higher, it took nearly 36 percent of the median income to afford a home during the 2005-2006 housing bubble.
But between those days and today, there is a stark difference. 30-year fixed loans were not being used by most homebuyers back then. With no money down and extremely low teaser rates, they were using all kinds of "creative" loan products. Adding to the balance of the loan, they also used negative amortization loans, which put payments off. The ensuing crash in the financial markets — precisely why many of these loans are illegal today, as these loans caused the extreme bubble.
"That's why we always use a 30-year fixed rate for comparison. It lets you know if something in the mortgage market itself (other than rates) is causing a change in the affordability equilibrium," noted Ben Graboske, executive vice president of Black Knight Data & Analytics. "Mortgage lending led to affordability getting out of whack back in 2006 due to mortgage programs increasing buying power and thus driving up home price when in reality, without those products, the affordability ratio (between home prices, incomes and interest rates) were nowhere near sustainable."
With the annual gains increasing each month, home prices rose steadily throughout last year. According to a new report from CoreLogic, prices were 7.2 percent higher nationally compared from December 2015, in December.
"As of the end of 2016, the CoreLogic national index was 3.9 percent below the peak reached in April 2006," said Frank Nothaft, chief economist for CoreLogic. "We expect our national index to rise 4.7 percent during 2017, which would put homes prices at a new nominal peak before the end of this year."
Certain local markets in California, Colorado and Texas have already moved well past the heights of the last housing boom and other indexes have shown home prices already surpassing their previous peak nationally. Low mortgage rates are no longer the main reason for higher prices. Tight supply and rising demand is the reason. As the leading edge of the massive millennial generation finally starts shopping for homes and as builders increase production only minimally, this spring could be the tightest market ever for homebuyers.
"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," Graboske said.
(Source:www.cnbc.com)