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Mortgage rates have eased from last year’s peaks and home prices in many markets have posted double-digit declines. But affordability “still has a stranglehold on much of the market,” according to research released Monday by data aggregator Black Knight.
With the monthly mortgage payment required to buy the average home still 40 percent higher than a year ago, most homebuyers are paying points to buy down the interest rate on their mortgage, said Black Knight Data and Analytics President Ben Graboske.
“What we’ve seen in response to this challenging environment is greater reliance on permanent rate buydowns by borrowers,” Graboske said in a statement. “There have been murmurs and stories around temporary buydowns, but those remain a relatively small share of originations in general.”
For the week ending Jan. 21, 56 percent of homebuyers locking rates on purchase loans paid points to permanently buy down their rate, Black Knight found. That’s down from 70 percent last fall when mortgage rates were hitting 2022 peaks.
Borrowers spending more to buy down mortgage rates
But in raw dollar terms, many mortgage borrowers were forking out about three times as much money to buy down their rate in January — $4,300 on average — as was common before the pandemic.
Paying one point equates to an additional $1,000 in costs for every $100,000 borrowed. Today, borrowers are not only paying more points, but higher home prices mean they’re taking out bigger loans, making rate buydowns costlier.
Black Knight data shows that from 2018 through 2020, borrowers taking out purchase loans or refinancing paid about one half a point on average, at a cost of about $1,500 on a $300,000 loan.
Borrowers buying down their interest rate in the third week of January paid 1.25 points on average, or $4,300 in additional costs on a $344,000 loan. At the end of September, when points peaked at 2.03 percent, borrowers were paying an average of $6,900 to buy down their rate.
While homebuyers buying down their rate in January paid an average of 1.16 points, borrowers refinancing their home to cash out equity paid 2.06 points on average — or about $5,500 on the average cash-out refi of $266,000.
“The oversized rate buydowns on cash-out refinances suggest borrowers are utilizing their historically strong equity positions to reduce the interest rate impact as they tap available equity,” Black Knight analysts noted.
Many lenders have recently begun offering temporary rate buydowns that only last one to three years. In some cases, temporary buydowns are offered as a seller concession instead of a price reduction.
But Black Knight’s data shows that temporary buydowns peaked in popularity in October and November, when about 4 percent of homebuyers locking rates on purchase loans took advantage of that option. Since then, temporary rate buydowns have waned in popularity, accounting for only 3 percent of rate locks during the third week of January.
Temporary rate buydowns haven’t taken off
The limited popularity of temporary buydowns may be for the best, since they could spell trouble for borrowers and investors down the line, Black Knight noted.
A 3-2-1 buydown reduces the interest rate by 3 percentage points in the first year, 2 percentage points in the second year and 1 percentage point in the third year. After that, the borrower pays the original locked rate for the duration of the loan term.
“Given that temporary buydowns with stepped provisions result in payment shocks to the borrower as their rates increase each year, the impact of such loans warrants oversight as we move into 2024 from both a delinquency and prepayment perspective,” Black Knight warned.
National mortgage delinquency rate ticks up from record low
While mortgage delinquencies remain well below the 2000-2005, pre-housing bust average, the national delinquency rate crept up 7 basis points from November to December, to 3.08 percent.
Foreclosure starts were also up 15 percent from November to December, to 26,900 — the third consecutive month-over month increase. But foreclosure starts remained 30 percent below pre-pandemic levels, with lenders initiating foreclosure proceedings on just 5 percent of the more than 500,000 homes whose owners were more than 90 days behind on their payments.
More borrowers have limited or no equity
Homeowners with mortgages saw about $2.3 trillion in equity evaporate during the last six months of 2022, leaving close to 5 percent of indebted homeowners with limited or no equity to protect them in the event of a downturn.
“While equity levels remain historically high, falling equity along with rising short-term rates are expected to create headwinds for home equity lending as we press forward into 2023,” Black Knight analysts noted.
Home prices down from peaks in most markets
Home prices have retreated from 2022 peaks in all but four of the nation’s 50 biggest markets, with every major market in the West seeing prices fall by 6 percent or more after adjusting for seasonal factors, including:
- San Francisco (-13 percent)
- San Jose (-12.7 percent)
- Seattle (-11.3 percent)
- Phoenix (-10.5 percent)
- Austin (-9.7 percent)
- Las Vegas (-9.3 percent)
- Sacramento (-9.3 percent)
- San Diego (-8.6 percent)
- Los Angeles (-7.6 percent)
- Salt Lake City (-6.9 percent)
- Denver (-6.9 percent)
- Riverside (-6.8 percent)
- Raleigh, N.C. (-6.3 percent)
- Portland, Oregon (-6.1 percent)
Mortgage payments still eat up more income than at 2006 peak
With mortgage rates also falling from 2022 peaks, the monthly mortgage payment required to purchase the average home with 20 percent down has decreased by more than $200 since October, but was nearly $600 higher than a year ago.
At 34.8 percent, the national payment-to-income ratio is down from a recent high of 38.4 percent in October, 2022 when rates averaged nearly 7 percent. But the national payment-to-income ratio remains above the peak seen in 2006 before the Great Recession, and affordability “is expected to continue to dampen demand and put downward pressure on home prices as we move into the traditional spring homebuying season,” Black Knight said.
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