Home prices are dropping while affordability remains near a multi-decade low.

Home prices continue to pull back and interest rates have come down from their peak, but it’s hardly had an effect on affordability. That was the conclusion to Black Knight’s recent Mortgage Monitor report. What it has done, though, is expose a growing pocket of equity risk concentrated among purchase mortgages originated in the last year or so. As a result, 1 in 12 mortgaged homes bought in 2022 are now underwater, Black Knight said. The housing market correction has only just begun. Nationwide, home prices are dropping, and the 30-year interest rate dipped by nearly half a percentage point in recent weeks, yet home affordability remains near a multi-decade low. Adjusted for seasonality, 80% of major markets have now begun to see prices come off their peaks. Some markets are seeing stronger declines than the national average, with nearly a quarter down by 4% or more on a seasonally adjusted basis. Currently, monthly payments are equivalent to 37.4% of the median monthly household income, down slightly from October 38.5%, but still uncomfortably close to the near 40-year high, the report states. Though it seems counterintuitive, a higher rate environment may be limiting the pace of price corrections due to its dampening effect on inventory inflow and subsequent gridlock in home sale activity. Near multi-decade low affordability would suggest home prices should be seeing strong declines, stalling inventory levels are holding home prices higher than current demand levels would suggest they should be.

Source: National Mortgage Professional