- According to Black Knight, the average household now spends 31% of their income on mortgage payments.
- That’s up from 24% in December and the highest share since 2007.
- New data shows Americans are bearing higher housing costs as mortgage rates rise.
Americans are still clamoring for homes despite soaring prices, and they’re spending more of their paychecks on mortgages than they have since the last housing bubble.
Mortgage rates rise as
raises interest rates in hopes of cooling demand across the economy. Yet the US real estate market is still in turmoil, leaving buyers with an even higher barrier to entry.
According to new data from Black Knight, a provider of mortgage technology and data, the typical household now spends 31% of their income on mortgage payments. This is the largest share since 2007 and up from 24% at the end of last year.
The surge in the mortgage payment-to-income ratio highlights the problem facing future home buyers in the United States. House prices have soared throughout the pandemic, as record mortgage rates and intense demand have fueled a historic housing shortage. Various housing market indicators posted the highest numbers since the bubble of the late 2000s, and fears of another crash quickly surfaced.
There are some signs suggesting that the market is starting to cool down. Housing starts unexpectedly climbed in March at the fastest pace since 2006, signaling that contractors are racing to meet demand.
The surge in mortgage rates – one of the fastest in history – should also dampen the buying frenzy. The average rate on a 30-year fixed mortgage rose to 5.11% in the week ending Thursday, according to Freddie Mac, from 3.11% at the end of last year. Higher rates mean more expensive borrowing, and the rise should dampen some of the buying that relied on the low rates seen throughout the pandemic.
However, it may take some time before rising rates cut off demand. Data from Black Knight suggests buyers are ready to dig deeper into their pockets despite higher rates and prioritize buying a home rather than waiting for the market to normalize.
Although this has led many Americans to draw comparisons to the housing bubble of the mid-2000s, there are clear signs that the United States is not repeating history – and they are mainly related to the fact that buyers homeowners today are in a much better financial position. .
“It’s not the same market as it was in 2008,” Odeta Kushi, First American’s deputy chief economist, previously told Insider. “It’s no secret that the housing market played a central role in the Great Recession, but this market is just fundamentally different in many ways.”
While the current market irregularities are rooted in a major imbalance between supply and demand, the real estate bubble that caused the 2008 crisis was caused by an explosion of often dubious mortgage financing.
In the mid-2000s, a combination of abusive lending practices, cheap debt and complex financial engineering contributed to millions of borrowers being placed in mortgages they could not afford. When these borrowers defaulted on their loans, it triggered a crisis of foreclosures in the housing market and a credit crunch among investors who owned bonds backed by their defaulted mortgages, which also gave rise to the worst financial crisis in modern history.
In 2022, lending standards have tightened and the subprime lending that fueled the crash of 2008 is not as prevalent today. Shoppers also have more purchasing power, with median household wealth up more than 48% since 2006.
This growth helps explain why homebuyers — regardless of historically high home prices and rapidly rising mortgage rates — continue to compete for the limited number of homes available for sale.
With data from Black Knight indicating that buyers are not calling for it in the immediate future, there is little hope that market demand will cool off anytime soon.