Black Knight Financial Services took close-up looks at both
home affordability and the recent surge in cash-out refinancing in its new Mortgage Monitor released on
Monday. The publication reflects data
through the end of December 2015.
The company said that there have now been 43 consecutive
months of annual home price appreciation, causing it to revisit the question of
affordability. Its analysts used
national medians for home prices and household income levels and found the
mortgage payment-to-income ratios still favorable by historic standards.
Looking at median principal and interest payments in each
October over the last 15 years the company saw those payments consuming 26
percent of median household income in 2000, rising to 33 percent at the peak of
the bubble in 2006 before falling to 18 percent as prices bottomed out in
2012. The median across those years was
26 percent. In October 2015 a mortgage
payment required 21 percent, still considered an affordable level.
However, as Black Knight Data &
Analytics Senior Vice President Ben Graboske explained, the long-term impact of
rising interest rates and home prices on affordability varies with geography
and warrants close observation moving forward. " When we look at an example
scenario using today's rate of home price appreciation and a
50-basis-point-per-year increase in interest rates," Graboske said, "we see
that in two years home affordability will be pushing the upper bounds of that
Under this scenario, within 12 months
the payments on a median priced home would rise $114.00 per month requiring 24
percent of household income, still below the 2000-2002 average. After 24 months the monthly payment would be
$240 higher consuming 26.5 percent of income.
Black Knight points out that interest rates have a much greater impact
on affordability than home price appreciation.
A 1 point rise in rates is equivalent to a 13% jump in home prices.
While rates rise similarly across
states those increases can have different impacts on affordability from state
to state. Black Knight applied the same formula
to each state, benchmarking each against its own pre-bubble affordability
Graboske continues, "At the state level
under that same scenario, eight states would be less affordable than 2000-2002
levels within 12 months and 22 states would be within 24 months. Right now,
both Hawaii and Washington D.C. are already less affordable than they were
during the pre-bubble era. On the other hand, even after 24 months under this
scenario, Michigan - among other states - would still be much more affordable
at the end of 2017 than it was in the early 2000s.
Even though they had touched on it in
the January Mortgage Monitor Black Knight returned to the subject of cash-out
refinances. There were nearly 300,000
such refis originated in the third quarter of 2015, about 42 percent of all
first mortgages refinances, and roughly a million were origination over the
most recent 12 month period. Cash-outs
have increased for six consecutive quarters.
Likewise the average cash-out amount of
over $60,000 is the highest since 2007.
The total amount of equity tapped out over the past 12 months was $64
billion, the highest dollar amount for any 12 month period since
2008-2009. Still this is less than 2
percent of the available equity that might be tapped, 80 percent less than the
total amount of equity extracted from housing in 2005-2006. The last time interest rates rose by 50 basis
points, in late 2013, early 2014, the share of equity tapped dropped to the
lowest on record, below 1.5 percent.
As the Monitor pointed out last month, the resulting loan-to-value of
these originations is a record low of 67 percent, and the credit score of the
borrowers involved is quite high at an average of 748. That score however is still 30 points lower
than the average for home equity lines of credit (HELOCs). This, Black Knight says, may entice some
potential HELOC borrowers with more moderate credit scores to opt for a
refinance even though rates may be slightly higher.