Home affordability fell to the lowest level in seven years at
the end of 2016, and the ingredients for a reversal are not there anytime soon.
It now takes 22.2 percent of median income to make the monthly
principal and interest payment on the median priced home, according to a new
report from Black Knight Financial Services, which based the measure on
borrowers using a 30-year fixed mortgage. That monthly payment on the
median-priced home increased 10 percent in the fourth quarter alone, thanks to
a sharp jump in mortgage rates following the presidential election.
During the 2005-2006 housing bubble, it took nearly 36 percent
of the median income to afford a home, as home prices and mortgage rates were
higher.
But there is a stark difference between those days and today.
Back then, most homebuyers were not using 30-year fixed loans. They were using
all kinds of "creative" loan products with no money down and
extremely low teaser rates. They also used negative amortization loans, which
put payments off, adding to the balance of the loan. These loans caused the
extreme bubble and the ensuing crash in the financial markets — precisely why
many of these loans are illegal today.
"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."
Home prices rose steadily throughout last year with the annual
gains increasing each month. In December, prices were 7.2 percent higher
nationally compared from December 2015, according to a new report from
CoreLogic.
"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."
While we are far from
"bubble" territory, we can expect the trend of housing becoming a
larger portion of wages.
