Housing Collapse Coming Right Up

Mortgage rates are high and rising. Refinancing opportunities are nonexistent; home affordability has collapsed.

The latest Black Knight Mortgage Monitor is worth a very close look.

Here's what the report says about the feature chart.

  1. Recent rate jumps coupled with climbing home prices have increased the cost to purchase the median home by $67/month (+6 percent) over the past six weeks.
  2. Overall, it costs $1,141 in monthly principal and interest to purchase the median home using a 30-year fixed mortgage with 20 percent down, the largest monthly payment required since late 2008.
  3. It currently takes 23 percent of the median income to purchase the median home, the highest share since 2009.
  4. However, overall affordability remains better than long-term historical averages, even taking the recent rate jump into consideration. Purchasing the median home requires one percent less of the median income than 1995-1999, three percent less than 2000-2003 (before the sharp run-up in home prices) and two percent below those combined benchmarks (1995- 2003).
  5. Average incomes are more than 20 percent higher today than in 2006 (according to the Census Bureau) and interest rates 2.3 percent lower. As such, affordability remains much better than at the pre-recession peak, even though today’s home prices have surpassed 2006 levels.
  6. Assuming all else remains equal, to return to 2006 affordability levels, interest rates would have to climb north of 8.0 percent or the median home price increase to $420K.

Statistical Nonsense

Black Knight is correct on points 1-3. Statistically, it is correct on points 3-6. However ...

Regarding point 5: It's not average incomes that matter, it's median incomes.

Regarding points 4 and 6: Those who want a home and can afford a home have a home. The rest struggle because incomes have not kept up with home prices.

Notions of affordability are statistical nonsense. Black Knight does mention some of these issues in relation to other charts.

Home Price Appreciation by Tier

  1. Rising interest rates may put more pressure on borrowers with below average incomes buying below average priced homes.
  2. Affordability is lower in those segments compared to long-term benchmarks, and rising interest rates put more strain on affordability.
  3. The annual rate of appreciation on Tier 1 properties (lowest 20 percent by price) is 1.9 percent higher than the overall market average.
  4. Although the margin has declined in recent months, as of December 2017, the Tier 1 annual rate of appreciation was 75 percent higher than that of Tier 5 (a difference of 3.6 percent).
  5. Tier 1 home prices have now been the fastest appreciating quintile nationally for 67 consecutive months. The same trend holds true in 45 of 50 states and 90 of the nation’s largest 100 metro areas.
  6. Larger overall increases in value among lower-priced homes is not just a recent trend, though; the same dynamic is observed when looking back over the past 15 years.

Bingo!

Black Knight is six for six on that analysis.

It gets worse.

Refinancing Opportunities

Wants vs Needs

Anyone seeking to refinance will discover the opportunities have essentially vanished.

Anyone needing to refinance to lower their payments is in outright trouble.

Refinance Woes

Affordability Silliness

Brush aside affordability silliness.

It's not the the average income that matters. Not even the median income matters.

It is the median income of those looking to buy a home that matters!

On that there are no stats. But take another look at the lowest tier home price appreciation charts.

Compare tier one housing prices to real median wages, down seven of the last 11 years as noted in How the Fed's Inflation Policies Crucify Workers in Pictures.

Next, factor in millennial attitudes towards debt coupled with their desire to remain mobile, and you know where housing is going based on this data.

Expect a Housing Collapse

The more hikes the Fed gets in, the bigger the collapse and the bigger the resultant deflation.

Mike "Mish" Shedlock

Comments
No. 1-25
tedr01
tedr01

If you are right than 1930's here we come. Where is Helicopter Ben Bernanke when we need him??

Latkes
Latkes

Overall, it costs $1,141 in monthly principal and interest to purchase the median home using a 30-year fixed mortgage with 20 percent down, the largest monthly payment required since late 2008.

Isn't this number nominal, not adjusted for inflation? If so, then you should also use nominal wages in your analysis, not real.

Rayner-Hilles
Rayner-Hilles

No no no, Mish, you've got it all wrong. The world economy is overheating and wages across the board are inflating like mad. Mortgage rates have to go up to stop too many people buying houses too quickly so that wages increase even more so. This is a housing overaffordability crisis.

...Why just the other day I got a huge raise (again) so I decided I was going to buy a third house just because, but after seeing the going rate of mortgage in my city online I decided it would be best to save the disposable income at my bank. The Fed are a smart lot indeed.