Home prices growth and mortgage rates have come down from the peaks in 2022, but affordability still remains a challenge. In turn, borrowers who are entering the market are leaning heavily toward buying down their first lien interest rates by paying points up front. 

In the third week of January, 57% of all borrowers who locked in rates paid at least a half-point, 44% paid at least a full point and nearly a quarter lowered their mortgage rates with buydowns of two points or more, according to Black Knight’s mortgage monitor report. 

Purchase borrowers, who now make up 82% of new rate locks, paid an average of 1.16 points. For those looking to pull cash out of their homes, the cost was nearly twice that, with an average of 2.06 points paid, Ben Graboske, president of Black Knight Data & Analytics, said. 

Prior to the pandemic, buyers paid closer to 0.5 points on average, with a corresponding cost of about $1,500, in 2018 through 2020. 

“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,” Graboske said.

“December did see home values post their sixth consecutive monthly decline, and prices at the national level are now 5.3% off their June 2022 peak (…) Affordability still has a stranglehold on much of the market,” he noted. 

Compared to the same time last year, the monthly mortgage payment on an averaged-priced home is 40% higher, or nearly $600 more, using a 20% down payment on a 30-year fixed-rate mortgage. 

On the flip side, temporary rate buydowns remained a relatively small share of originations. Only about 3% of purchase loans locked on Black Knight’s Optimal Blue platform included a temporary buydown. Just over 2% involved a two-year temporary buydown, according to the report. 

Optimal Blue rate lock data showed purchase rate locks rose by 64% from the first to the fourth week of January, marking the sharpest rise in the past five years. While buyers seem to be returning to the market early in 2023, purchase loans locked in January are still off by 13% compared to the 2018 and 2019 pre-pandemic levels. 

Purchase locks in the third week of January made up 81.7% rate locks, with cash-out refis making up 13.7% and rate/term accounting for just 4.6%. 

“Refinance locks edged higher as well but remain near all-time lows due to the lack of rate-driven refi incentive and the higher cost of tapping homeowner equity through cash-out loans,” the report noted. 

As sales volumes continued to slump, inventory growth stalled, as sellers are taking a step back from listing their homes. New listing volumes were 23% below pre-pandemic average in December, marking the largest monthly deficit on record outside of April 2020.

For-sale inventory grew by 33% on a seasonally adjusted basis from March to July, but inventory levels stalled later in the year before falling by 5% in December — the first meaningful decline in nearly a year. 

Prepayment activity was down 2.7% in December from November and was a whopping 76% lower year over year due to a dwindling refi market. 

The national delinquency rate rose seven basis points in December to 3.08% but finished the year 30 bps below than the same period last year. 

If the current rate of monthly decline continues, the annual home price growth rate is projected to go negative in the next three months, according to the report.

Softening home prices continued to impact borrowers’ equity positions, with mortgage holder equity falling by $2.3 trillion — a 13% decline — over the past two quarters. 

Oversized home price declines in equity in the West Coast markets — Los Angeles, San Francisco, San Jose and Seattle in particular — account for nearly one-third of the overall national decline in mortgage holder equity over the past two quarters. 

“While levels remain historically high, falling equity along with rising short-term rates are expected to create headwinds for home equity lending as we press forward into 2023,” the report noted.