The November 2023 ICE Mortgage Monitor Report, produced by the Intercontinental Exchange, found that October was another challenging month for homebuyers.
The major factor is interest rates, as they continue to put significant pressure on affordability, which, in turn, affects homebuyer and borrower demand. As ICE Vice President of Enterprise Research Andy Walden said, mortgage interest rates spent the entire month of October, except for one day, above 7.5 percent. Rates topped out at 7.8 percent on Oct. 25.
“Mortgage rates haven’t been that high in 23 years, which continues to hammer affordability. The situation was already dire, but recent weeks have seen rates climb to where it now takes nearly 41 percent of the median monthly income just to make the P&I payment needed to purchase the median-priced home. That payment has risen by $144 over the past 30 days and now sits above $2,500 a month for the first time in history. Keep in mind that record-high payment doesn’t include taxes, insurance or any HOA fees that may be part of the homeowner’s monthly expenses. For the last 35 years, the share of income needed to cover P&I has averaged below 25 percent.”
The last time affordability was this bad was in the 1980s when rates were in the double digits and the average home was about 3.5 times median income, Walden said. Today’s price-to-income ratio of nearly 6-to-1.
“Historically tight inventory levels have been further bolstering prices, which hit yet another all-time high in September, with the annual growth rate accelerating to 4.3 percent from effectively flat just four months before. That said, the pace of monthly gains slowed to +0.39 percent in September, marking the smallest seasonally adjusted gain since January. Rates are up 75 basis points from when September’s closed sales went under contract, which has cut consumer buying power by another 8 percent in the time since. Now, with rates above 7.5 percent and affordability at a 39-year low, it’s fair to expect prices to weaken later in 2023,” Walden added.
Additionally, consumer demand is already showing further signs of stress. Purchase-mortgage applications ran 47 percent below pre-pandemic levels the week of Oct. 26 – the weakest they have been all year. Further, the refinance market is essentially non-existent right now, Walden said.
“In fact, the refinance market in general is but a shadow of what it once was. There are pockets of cash-out lending occurring among a particular set of borrowers, but even that has been a niche market. Given that homeowner equity has risen alongside home prices and is now within 2 percent of the peaks we saw in 2022, it makes sense that cash-outs would still appeal to some borrowers,” Walden said. “Together, U.S. mortgage holders have some $16.4T of equity in their homes. Of that total, $10.6T is what we refer to as ‘tappable equity,’ meaning the amount a homeowner could borrow against while keeping at least a 20 percent equity stake in their property.”