Rising home prices cut into affordability gains from interest rate drops

by Ryan Smith03 May 2016
Mortgage savings that homeowners would have realized because of falling interest rates have been cut into deeply – and in some cases, canceled out entirely – by rising home prices.

Black Knight Financial’s monthly Mortgage Monitor report, released Monday, calculated how much per month it would cost to purchase a median-priced home. “All else being equal, interest rate declines would save borrowers significant money on a home purchase,” Black Knight stated in a release.

Unfortunately, all things are not equal, as Ben Graboske, Black Knight Data & Analytics senior vice president, explained. 

"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,” Graboske said. “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.”

It’s not all bad news, Graboske stressed.

“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,” he said. “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. 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 BPS drop in interest rates."



Is TILA-RESPA a good or bad thing long term?