March 2022 Mortgage Monitor

JACKSONVILLE, Fla. – May 2, 2022 – Today, the Data & Analytics division of ICE released its latest Mortgage Monitor Report, based upon the company’s industry-leading mortgage, real estate and public records datasets. As home prices and interest rates continue their sharp upward climb, this month’s report revisits the mounting affordability pressures resulting from these competing dynamics. According to Data & Analytics President Ben Graboske, though home price appreciation slowed in March – albeit very slightly – 30-year mortgage interest rates above 5% have pushed affordability very near its all-time worst level.

“After accelerating for the last four months, the rate of annual home price growth actually slowed a bit in March,” said Graboske. “Still, at 19.9% – down from an upwardly revised 20.1% in February – March would have otherwise set yet another record for appreciation. Year-to-date, home prices are already up nearly 6% nationwide with nearly 25% of the nation’s largest markets seeing gains of more than 7% over the last three months alone. With 30-year interest rates hitting 5.11% as of April 21, the impact these price gains have had on home affordability is significant.

“As measured by the share of median income required to make the P&I payment on the average-priced home bought with 20% down, U.S. housing was the least affordable ever back in July 2006 when it took 34.1% to make that P&I payment. At the end of February 2022, we were already at 29.1% – and both rates and prices have continued to climb since then. As of April 21, that payment-to-income ratio has now climbed all the way to 32.5%, within just 1.6 percentage points of the prior record. In ‘kitchen table’ terms, that equates to a $522 higher average monthly P&I payment – a 38% increase since January – with that payment up $790 (+72%) since the start of the pandemic. It won’t take much to push us past 2006 levels either; a 50 basis points jump in 30-year offerings or a 5% rise in home prices would push affordability to its worst level on record. And saying that, we should also keep in mind that they’ve already risen 200 basis points and 5.9% respectively this year.”

Leveraging rate lock data from Optimal Blue, a division of ICE, this month’s Mortgage Monitor shows that these market dynamics have made ARMs increasingly more attractive to borrowers. Indeed, the spread between 30-year and ARM offerings is now the widest it’s been since 2014, and within 20 basis points of an all-time high. As of mid-April, the average 5/1 ARM had a 1.3% lower initial rate than 30-year mortgages. In turn, the ARM share of purchase rate locks by volume has spiked from 2.5% in December to nearly 8% in March, the highest such share since Optimal Blue began reporting the metric in 2017.

While the ARM share is now at or near a post-Great Financial Crisis high, it still pales in comparison to the 40%+ of purchases completed via ARMs at the peak in 2005. Risk characteristics of these loans remain conservative as well: ARMs with 7-10-year introductory periods make up the vast majority of ARM originations (85% in 2021) and the average debt-to-income ratio among March ARM rate locks remained below 31%. Today’s average ARM credit score of 757 is also the highest since at least 2017, and the number of outstanding ARMs is the lowest in more than 20 years. Still, nearly 1.4 million active ARMs are in the adjustable phase and may face rate – and subsequently payment – increases in coming months driven by sharp rises in underlying ARM indexes. ICE will continue to monitor the situation in the months to come.

Finally, though the appetite for “Expanded Guideline” purchase loans – a proxy for the non-qualified mortgage (non-QM) market – was all but non-existent early in the pandemic, rate locks on such loans have since hit a multi-year high driven by widening spreads, tightened affordability and increased investor appetite. While such loans only made up approximately 3% of all purchase locks in recent months, they are worth keeping an eye on given continued market shifts.