Housing affordability plummets as mortgage rates climb in April
Nationally, housing affordability declined in April compared to the previous month according to the NAR Housing Affordability Index. Compared to the previous month, the monthly mortgage payment increased by 14.5%, while the median family income increased slightly by 0.7%.
Compared to a year ago, affordability declined in April, with the monthly mortgage payment up 45% and median family income up 2.5%. The effective 30-year fixed mortgage rate1 was 5.05% in April from 3.11% a year ago, and the median sale price of existing homes was up 14.8% from a year ago.
In April 2022, the national and regional indices were all above 100, except in the West where the index was 88.4. An index above 100 means that a family with the median income had more than the income needed to afford a house at the median price. The income required to pay a mortgage, or qualifying income, is the income needed to make mortgage payments on a 30-year fixed rate mortgage with a 20% down payment equal 25% of family income.2 The most affordable region was the Midwest, with an index value of 150.3 (median family income of $88,711 with qualifying income of $59,040). The least affordable region remains the West, where the index is 88.4 (median family income of $96,391 and eligible income of $109,008). It would be the second month in a row that the West index was below 100. The South was the second most affordable region with an index of 109.8 (median family income of $82,314 and qualifying income of $74,976 ). The Northeast was the second most unaffordable region with an index of 117.6 (median family income of $102,119 with qualifying income of $86,832).
Buying a home was unaffordable for a typical first-time home buyer intending to purchase a typical home. First-time home buyers typically spent 25.6% of their household income on mortgage payments, making home buying unaffordable. A mortgage is affordable if the mortgage payment (principal and interest) is 25% or less of family income.2
Housing affordability3 recorded double-digit declines from a year ago in all four regions. The South recorded the largest drop of 33.5%. The Midwest and Northeast regions both saw a slowdown in price growth from a year ago of 25.2%. The West saw the smallest drop of 21.5%.
Affordability was down in all regions compared to last month. The Midwest region fell 12.7%, followed by the Northeast with a 12.6% decline. The South fell by 12.4% followed by the West which recorded the smallest drop of 9%.
Nationally, mortgage rates rose 194 basis points from a year ago (one percentage point equals 100 basis points), from 3.11% to 5.05%.
Compared to a year ago, the monthly mortgage payment has increased from $1,184 to $1,717, an increase of 45%. The annual mortgage payment as a percentage of income fell from 16.2% a year ago to 22.9% in April due to rising house prices compared to modest gains in median family incomes. Regionally, the West has the highest share of mortgage payment to income at 28.3% of income. The South had the second highest share at 22.8%, followed by the Northeast with its share at 21.3%. The Midwest had the lowest mortgage payment as a percentage of income at 16.6%. Mortgage payments are not onerous if they do not represent more than 25% of income.4
According to the Mortgage Bankers Association last week mortgage applications were up 6.5% from the previous week.5 The cost of buying a home continues to rise and become more difficult for all potential homeowners, especially first-time home buyers. Inflation is impacting the whole economy and rising mortgage rates are making affordability more difficult. Mortgage payments are rising rapidly and income growth cannot keep pace.
The calculation of the housing affordability index assumes a down payment of 20% and a qualifying ratio of 25% (payment of principal and interest relative to income). See more details on the methodology and assumptions underlying the calculation.
1 Beginning in May 2019, the FHFA discontinued the publication of several mortgage rates and only published an adjustable rate mortgage called PMMS+ based on Freddie Mac’s Primary Mortgage Market Survey. With these changes, NAR has discontinued the publication of the HAI composite index (based on a 30-year fixed rate and ARM) and from May 2019 only publishes the HAI based on a 30-year mortgage. NAR calculates the effective 30-year fixed rate based on Freddie Mac’s 30-year fixed mortgage contract rate, 30-year fixed mortgage points and fees, and a median loan value based on the median NAR price and a 20% deposit.
2 Housing costs are heavy if they represent more than 30% of income. The 25% share of mortgage payment in income takes into account that homeowners have additional expenses such as mortgage insurance, homeowners insurance, taxes and property maintenance expenses.
3 A Home Affordability Index (HAI) value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a home at the median price. An index of 120 means that a family earning the median income has 20% more than the income level needed to pay the mortgage on a house at the median price, assuming a down payment of 20% so that the monthly payment and interest does not exceed 25% of this level of income (qualifying income).
4 Total housing costs which include mortgage payment, property taxes, maintenance, insurance and utilities are not considered an expense if they do not represent more than 30% of income.
5 The Mortgage Bankers Association (MBA) analyzing data from Ellie Mae’s AllRegs® Market Clarity® market intelligence tool. A drop in the MCAI indicates that lending standards are tightening, while increases in the index indicate an easing in credit.