U.S. Home affordability hits worst level since 2006

With home prices still making double-digit gains and mortgage rates now at their highest level since 2009, Americans are facing the worst home affordability in 16 years. Now, almost all housing markets in the U.S. are less affordable than they have been historically, with affordability close to its lowest-ever point on record. 

Black Knight, a mortgage technology and data provider, said its latest calculations show that 95% of the biggest 100 U.S. housing markets are less affordable than their long-term records. That compares to just 6% of markets that were at that figure prior to the COVID-19 pandemic. In addition, it said 37 of the biggest markets are now less affordable than at any time in recorded history. 

While home price gains did slow in March, they are still up 19.9% year over year. Prices rose 2.3% in March compared to the month before, the fifth time since the pandemic started that they have gained at least 2% in a single month. 

Moreover, the average rate on a 30-year fixed-rate mortgage has risen to 5.55%, up from 3.29% at the start of the year, Mortgage News Daily reported this week. 

The result is that home affordability is now at its lowest level since July 2006, when mortgage rates averaged around 6.75%. At that time, it took around 34% of the median U.S. income to cover the costs of a monthly mortgage payment for a home purchased with a 20% down payment. 

Now, that payment-to-income ratio has hit 32.5%. Traditionally, ratios over 21% have led to housing markets cooling off, but the last two years have been an exception as home prices keep on rising. Experts say the pandemic has created an anomaly, with persistent high demand and extremely low supplies continuing to push up prices. 

Black Knight said that if home prices rise by another 5%, or if interest rates rise by another 50 basis points, home affordability will hit its worst level on record. It said the 5% rise in home prices is more likely to occur. 

At present, the median monthly mortgage payment is now $1,809, up 38% ($552 a month) since April 2021 and up 72% ($790) since the beginning of the pandemic. 

The worsening home affordability has resulted in many home buyers switching to a riskier adjustable rate mortgage, which offers a lower starting interest rate but can eventually adjust to a much higher rate, depending on market conditions.