Report: Home Price Increases Muting Affordability Gains From Low Interest Rates

Posted by Patrick Barnard on May 02, 2016 No Comments
Categories : Residential Mortgage

Interest rate decreases since the start of this year have resulted in the population of “refinanceable” mortgage borrowers swelling to about 7.5 million, according to Black Knight Financial Services’ Mortgage Monitor report for March.

However, the seemingly unstoppable momentum in home price appreciation is impacting the attractiveness of refinancing for many borrowers, the firm’s research shows.

The interest rate drops alone since March 2015 have added about 2.3 million borrowers to the refinanceable population, Black Knight’s research shows.

But rising home prices are muting – and in some areas, completely canceling out – the positive impact declining rates would have on home affordability.

“Excluding home price movement, the interest rate decline since the start of the year would save borrowers approximately $44 a month when purchasing the median-priced home nationally,” explains Ben Graboske, senior vice president for Black Knight Data & Analytics, in a statement. “However, when you factor in estimated home price appreciation (HPA) – the most recent Black Knight Home Price Index Report for February showed annual HPA at 5.3 percent – those monthly savings fall to just $18.

“The mortgage on a median-priced home is still more affordable than it was in December, despite rising prices, just not as much as one might expect, given that rates are as low as they are,” Graboske adds. “This isn’t to say that interest rate reductions aren’t beneficial to buyers – they almost certainly are. If rates hadn’t dropped over the past four months, it would cost an additional $28 to buy the median-priced home today as compared to December 2015.

“By and large, borrowers are still seeing net reductions in monthly payments across the country heading into the early home buying season,” he continues. “In some areas, though, prices are appreciating so quickly that they may have fully offset any savings from rate declines. Assuming the HPA observed in February continues through March and April, it may actually cost home buyers more in monthly principal and interest to purchase the median-priced home in Washington, Colorado and Oregon than it did at the end of 2015, even with a 35 [basis point] drop in interest rates.”

To read the full report, click here.

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