If rates increase another half a percentage point (they just did) or if home prices jump another +5%, housing affordability will hit the worst affordability levels on record, according to Black Knight.
Payment-to-Income Ratio (PMI) Hit 32.5% as of April 21
According to Black Knight, the best measure of affordability is the payment-to-income ratio (PMI).
Ideally, the share of median income a buyer puts down on an average priced home is 20% in order to set aside enough income to make their monthly mortgage payment. Any share higher than a 20% translates into problems with home affordability.
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During July 2006, our national PMI hit an all-time high of 34.1%. As of April 21, 2022, Black Knight indicated that our national PMI hit 32.5%, the second worst home affordability measure ever, due to home prices being up +19.9% y/y, according to CoreLogic, and mortgage rates hitting 5.5%, according to Mortgage News Daily.
This PMI measure of 32.5% translates into the average mortgage payment increasing +38% just this year to $1,884 and an increase of +72% since the onslaught of the COVID pandemic, according to Black Knight Data & Analytics President Ben Graboske.
Because of the average mortgage payment increase of +38%, 95% of the 100 largest housing markets in the country are now less affordable than their long-term levels.
How Are Buyers Making It Work?
For the homebuyers who are still able to buy a home in these market conditions, many consumers are now turning to adjustable-rate mortgages (ARMs) that offer a lower interest rate than the conventional 30-year single-family fixed-rate mortgage. That lower interest rate then adjusts upward (just like the name says) after a short period of time.
(ARMs were used as an alternative to conventional mortgages to the benefit of few during the 2007-09 Housing Crisis. ARMS are still considered risky but less so today because of restrictions that have been put in place.)
According to Black Knight, the ARM share of rate locks from potential homebuyers jumped nearly 8% in March from 2.5% in December. As of last week, that share was more than 9%, according to the Mortgage Bankers Association.
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