Mortgage payment amounts grew last month despite lower interest rates

Purchase applications from January show home affordability declining, even as interest rates fell steadily throughout the month, according to the Mortgage Bankers Association.

After two consecutive monthly drops, the median payment amount applied for on new purchase applications increased to $1,964 in January, rising 2.3% from $1,920 in December, the MBA reported. The median shot up by $437 on a yearly basis, a 28.7% increase.

That move drove the association's Purchase Applications Payment Index, which tracks how new monthly mortgage payments vary over time relative to income, higher by 0.9% to a reading of 160.9. A month earlier, the PAPI came in at a mark of 159.5. Compared to January 2022 when it hit 132.7, the index is up 21.2%. An increase indicates worsening buyer affordability.

"Although interest rates fell 16 basis points from December 2022 to January, home buyer affordability declined slightly due to the increase in the median purchase application amount, which inched up $12,000 to $312,000," said Edward Seiler, MBA's associate vice president, Housing Economics and executive director of Research Institute for Housing America.

Recently, the National Association of Realtors similarly found affordability pressures increasing at the end of last year due to elevated prices. A rate surge early in the fourth quarter also contributed to buyer woes.

Ongoing challenges coming from different directions make affordability relief unlikely in the near term, which could further impact struggling lenders. Purchase applications recently fell to a 28-year low as interest rates headed back upward, according to MBA's weekly survey of mortgage companies. 

"MBA expects the combination of economic uncertainty, high mortgage rates and persisting affordability challenges to impact purchase demand — especially at the lower end of the market where supply is still tight," Seller said.

Median payment amounts accelerated for both conventional borrowers and buyers applying through Federal Housing Administration-sponsored programs. The conventional median climbed 2.8% to $2,009 compared to December's $1,954. On a year-over-year basis, the amount surged 27% from $1,582.

Among FHA loan applicants, the monthly increase was more muted, with payments rising by only 0.1% to $1,619 from $1,602. But compared to January 2022, median payment amounts on FHA-guaranteed loan applications leaped 41.8% from $1,142. FHA loans are frequently used for purchasing starter homes popular with first-time buyers.

For purchases of newly built properties, though, the median payment decreased by $20 between December and January to $2,379 from $2,399, the MBA said. 

Buyer affordability decreased across racial groups at similar rates and corresponded to the national level. The PAPI score among Black households climbed up 0.9% to 160.9, and the index for Hispanic home buyers experienced the same percentage-point increase to finish at 153.8. Affordability among white borrowers likewise fell, with the PAPI rising to 160.6.

Four Mountain West states had the dubious distinction of leading the nation again in lack of home affordability. Nevada sat in the No. 1 spot, followed by Idaho, Utah and Arizona. At the same time, the District of Columbia, North Dakota, Connecticut, Arkansas and West Virginia came in with the lowest PAPI readings.