Mortgages: Affordability, Availability, and Applications - 2.16.2023

by New American Funding Sr. Insight Analyst Ryan Schoen

Quick Hit Summary for Loan Officers

Don’t let decreasing housing affordability and mortgage credit availability fool you. Over the course of the first few weeks of 2023, housing demand continues to defy expectations and remain strong. Purchase mortgage applications have seen a rebound and it appears as though there is more than a sufficient number of home buyers that can afford homes at these prices and mortgage rates than there are home sellers.

Key Points and Stats

1. The National Association of Home Builders (NAHB) reported that housing affordability hit a record low of 38.1% of new and existing homes sold that would have been affordable to a family earning the local median annual income in 4Q2022.

2. 18 of the top 20 least affordable markets were all in California. (see table below)

3. The latest mortgage credit availability index (MCAI) reading fell by 0.1% to 103.2 in January and remained close to its lowest level since 2013.

Housing Opportunity

Last Thursday (Feb. 9th) the National Association of Home Builders (NAHB) reported that housing affordability hit a record low in 4Q2022. The NAHB measures home affordability by looking at the percentage of new and existing homes sold that would have been affordable to a family earning the local median annual income.

Their latest figure, known as the Housing Opportunity Index (HOI), came in at 38.1 at the national level. The index’s decline continued due to rising mortgage rates, which hit a series high of 6.66% in 4Q2022 for 30-year interest rates and outweighed the second consecutive quarterly drop in median home price, which fell to $370K.

Combining the mortgage rate and home price data together revealed principal and interest payments reaching a historic high of $2,379 per month or 31.7% of the median annual income of $90K at the national level.

Bay City, MI was rated the nation’s most affordable small market, with 88.5% of homes sold in the fourth quarter being affordable to families earning the median income of $74,800. The state with the most affordable small markets on the list is Illinois.

For the ninth straight quarter, Los Angeles-Long Beach-Glendale, CA remained the nation’s least affordable major housing market. There, just 2.2% of the homes sold during the fourth quarter were affordable to families earning the area’s median income of $91,100.

Moreover, 18 of the top 20 least affordable markets were all in California.?

Looking ahead NAHB positions future reports with optimistic expectations:

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“Rising mortgage rates, supply chain disruptions, elevated construction costs and a lack of skilled workers and lots all contributed to a declining housing market and worsening affordability conditions going back to the second quarter of last year,” said NAHB Chairman Alicia Huey, a custom home builder from Birmingham, Ala. “But we are anticipating a better affordability climate in the months ahead, with mortgage rates already posting a modest drop since the beginning of the year and expectations that the Federal Reserve will end its latest string of interest rate hikes by the end of the first quarter.”

“With mortgage rates anticipated to continue to trend lower later this year, affordability conditions are expected to improve, and this will increase demand and bring more buyers back into the market,” said NAHB Chief Economist Robert Dietz.

Mortgage Credit Availability

Last Thursday (Feb. 9th) the Mortgage Bankers Association (MBA) provided us with an update on mortgage credit availability conditions. Their report continued to suggest a mortgage lending landscape that remains constricted as lenders streamline their operations by dropping certain loan programs to simplify their offerings and cope with lower volumes.

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The latest mortgage credit availability index (MCAI) reading fell by 0.1% to 103.2 in January and remained close to its lowest level since 2013. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit.

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More recently, as mortgage rates declined throughout the past month adjustable-rate mortgage options and the amount of lender offerings fell out of favor reducing credit availability.

Mortgage Applications

Don’t let the decreasing mortgage affordability and mortgage credit availability fool you. Since the start of the year mortgage demand has started to rebound suggesting that the strong jobs market may support a strong housing market in 2023.

As Mike Simonsen of Altos Research puts it in his latest weekly update titled “Homebuyers Are Defying Expectations”, “so far this year demand for homes has exceeded the number of homeowners that are willing to sell.” He goes on to state that it seems as if there are a sufficient number of homebuyers that can afford to buy a home at these prices and these mortgage rates.

Resources:

1. Housing Opportunity Index

2. Mortgage Credit Availability Index

3. Mortgage Applications

4. Key Indicators Summary?