Black Knight: Lower Interest Rates Boost Home Affordability to Three-Year High

Black Knight, Jacksonville, Fla., said low interest rates reduced the national median income to make monthly principal and interest payments on the average-priced home in September to the most affordable level in three years.

The company’s monthly Mortgage Monitor said as of the end of September, it now requires just 20.7% of the national median income to make monthly principal and interest payments. That marks the second lowest national payment-to-income ratio in 20 months, behind only August.

Black Knight said home affordability briefly hit a 32-month high in early September, when interest rates dipped below 3.5% for a single week. The $1,122 in monthly P&I required to purchase the average-priced home is down 10% from November–when interest rates peaked near 5%–despite home prices rising more than 4% from that point.

“Back in November 2018, we were reporting on home affordability hitting a nine-year low,” said Black Knight Data & Analytics President Ben Graboske. “Interest rates were nearing 5%, pushing the share of national median income required to make the principal and interest (P&I) payments on the purchase of the average-priced home to 23.7%. While still below long-term averages, that made housing the least affordable it had been since 2009, spurring a noticeable and extended slowdown in home price growth. In the time since, rates have tumbled and the affordability outlook has improved significantly.”

The report said despite falling interest rates and steadily improving affordability over the preceding eight months, annual home price growth held flat in August at 3.8% after rising for the first time in 17 months in July. “It remains to be seen if this is merely a lull in what could be a reheating housing market, or a sign that low interest rates and stronger affordability may not be enough to muster another meaningful rise in home price growth across the U.S.,” Graboske said. That the strongest gains in–and strongest levels of–affordability were in August and early September could bode well for September/October housing numbers.”

Graboske added while prospective homebuyers continue to benefit from strong rate-driven buying power, interest rate movements are a key determining factor of housing affordability; “significant shifts in either direction can change the landscape quickly.”

The report also showed while falling interest rates have improved affordability across the country, pockets of tight affordability remain, especially along the western coast of the U.S. California accounts for seven of the 10 least affordable markets. In Los Angeles for example, even with rates at 3.64%, purchasing the average-priced home requires nearly 43% of the median household income–more than twice the national average. Tight affordability on the West Coast was likely a key driver in the strong deceleration in home price growth that began as interest rates rose in late 2018.