While home prices and interest rates have come down from 2022 peaks, affordability still remains “a significant challenge in the market,” according to Black Knight’s Data & Analytics division.
A manifestation of the affordability challenge is the increasing trend of borrowers buying down their first lien interest rates by paying points upfront.
“What we’ve seen in response to this challenging environment is great reliance on permanent rate buydowns by borrowers,” says Black Knight Data & Analytics president Ben Graboske.
In the third week of January, 57% of borrowers locking in rates paid at least a half-point as part of a permanent buydown, 44% paid at least a full point, and nearly 25% bought down their rates with two points or more, according to Black Knight’s Mortgage Monitor report. In September and October 2022, as many as 71% of borrowers paid points on permanent buydowns, and 43% paid two points or more.
“Prior to the pandemic-era housing boom, borrowers in 2018 to 2020 paid 0.5 points with a corresponding cost of around $1,500—as compared to $4,300 today and as high as $6,900 last fall,” Graboske says. “Purchase borrowers, who now make up 81% of new rate locks, paid an average of 1.16 points.”
Purchase rate locks increased by 64% from the first week to the fourth week of January. While the rate of increase in January 2023 is the sharpest rise in the past five years, the report shows there were 13% fewer January purchase loans locked in 2023 than 2018/2019 pre-pandemic levels.
“Based on our Optimal Blue rate lock data, we can see definite signs of a January uptick in purchase lending on lower rates and somewhat lower home prices,” Graboske says. “Indeed, locks on purchase mortgages soared 64% from the first through the fourth week in January. On the surface, it may seem the market has been stirred by a full point decline in interest rates and home prices coming off their peaks—but it’s not that simple.”
While Black Knight Home Price Index data indicates December 2022 was the sixth consecutive month of home price declines and prices at the national level are 5.3% below June 2022 peaks, Graboske says affordability “still has a stranglehold on much of the market” with monthly mortgage payments on the average-priced home more than 40% higher on a year-over-year basis.
According to Black Knight, December’s monthly home price declines pushed the annual home price growth rate to 5.0%, 0.4% above its 30-year average and the slowest annual growth rate since June 2020. In 2022 overall, home prices grew by 10.9% for the first half of the year before falling by 5.3% in the second half of the year. Black Knight projects that if the current rate of monthly declines persist, the annual home price growth rate will become negative within the next three months.
