Black Knight Inc.’s Mortgage Monitor report for April 2021 showed a new record for the home price growth rate, largely because of inventory challenges putting upward pressure on prices.
April’s annual home price appreciation was 14.8 percent, the highest growth rate recorded by the company, which has been tracking home prices since the mid-1990s. The price of single-family homes was a major contributor to the appreciation rate, as it was up 15.6 percent from the same time last year. Condo prices also were up 10 percent year-over-year. This marks 17 consecutive months of home price increases, and the inventory shortage continues to put upward pressure on prices, the report stated.
“Driving this growth are two key elements: historically low interest rates and – more acutely – the lack of available for-sale inventory,” Black Knight Data and Analytics President Ben Graboske said in a release. “The total number of active listings was down 60 percent from the 2017 to 2019 average for April. It’s not getting any better, either. Data from our collateral analytics group showed there was two months’ worth of single-family inventory nationwide in March, the lowest share on record and trending downward. In fact, there were 26 percent fewer newly listed properties in April as compared to pre-pandemic seasonal levels.”
Such aggressive home price growth has had an impact on affordability levels, even with interest rates within a quarter point of historic lows and staying under 3 percent, he added. As of the beginning of June, the share of the median income needed to make a monthly payment on a median-price home had risen to 20.5 percent.
“While still more affordable than the 25-year average of 23.6 percent, housing has surpassed its 5-year average of 20.1 percent, even with interest rates back below 3 percent,” Graboske said. “In recent years, 20.5 percent has roughly been the tipping point at which appreciation begins to decelerate, but given the severity of inventory shortages, home prices have – at least for now – continued to sharply accelerate even in the face of tightening affordability.”
The report also discusses how affordability will be affected if home prices continue to rise at their current rate in different mortgage rate environments. Should the 30-year interest rate increase to 3.5 percent by the end of 2022 and home price appreciation continues at its current rate, the payment-to-income ratio would hit 21.6 percent nationwide by the end of 2021, and 25 percent by the end of 2022. Should 30-year rates increase to 4 percent by the end of 2022, payment-to-income ratio would hit 22 percent by the end of 2021 and 26.7 percent by the end of 2022, If the rates rose to 4.5 percent by the end of 2022, payment-to-income ratio would hit 22.5 percent by the end of 2021 and 28 percent by the end of 2022.
These projections show that even if rates remain low over the next 18 months, the current rate of home growth is unsustainable. Though the above numbers are possible, it is likely that rising rates and tightening affordability will result in a deceleration in home price growth.