Adobe Stock / Fantasista

At the end of the traditional spring buying season, the housing market has shown “distinct signs” of reheating, according to the latest Mortgage Monitor Report from the Data & Analytics Division of Black Knight.

“There is no doubt that the housing market has reignited from a home price perspective,” says Black Knight vice president of enterprise research Andy Walden. “Firming prices have now fully erased the pullback we tracked through the last half of 2022 and lifted the seasonally adjusted Black Knight Home Price Index (HPI) to a new record high in May.”

Home prices increased 0.7% on a sequential basis in May, equating to an annualized growth rate of 8.9%. According to Black Knight, 27 of the 50 largest U.S. metros have returned to their prior home peaks or set new highs during the spring.

“While prices are still well below peak levels across the West and in many pandemic boom towns, price firming in recent months has begun to close those gaps,” Walden says.

For-sale inventory improved modestly during May but is still 51% lower than pre-pandemic levels, continuing to put upward pressure on home prices. Inventory levels have decreased in 95% of major markets analyzed by Black Knight, with the largest declines in Western metros, including Phoenix; Boise, Idaho; Ogden, Utah; San Francisco; and Colorado Springs, Colorado. New construction remains a bright spot in regard to inventory, however, with starts continuing to outpace expectations and reaching their highest level in more than a year. According to Black Knight, with existing homeowners listing their homes for sale at a 27% lower pace than normal, new homes are expected to continue to account for a growing share of overall sale activity in the market.

“As it stands, housing affordability remains dangerously close to its 37-year lows reached late last year, despite the Federal Reserve’s attempts to cool the market,” Walden says. “The challenge of the Fed now is to chart a path forward toward a ‘soft landing’ without reheating the housing market and reigniting inflation. But the same lever used to reduce demand—that is, raising rates—has not only made housing unaffordable almost universally across major markets, it has also resulted in a significant supply shortage by discouraging potential sellers unwilling to list in such an environment, further strengthening prices.”

According to Black Knight’s analysis, nationally it takes 35.7% of median household income to make the average principal and interest payment for a median-priced home. In Los Angeles, it now takes 68% of the local median income to afford the average home, assuming a 20% down payment. Other West Coast markets, including California’s San Diego, San Jose, and San Francisco, also require more than 50% of the local median income to afford a median-priced home. Cleveland, the most affordable market according to Black Knight analysis, has a payment-to-income ratio of 23%.

Black Knight projects it would take a 30% drop in home prices to return to normal affordability levels; alternatively, if prices remained the same and mortgage rates fell to 5%, it would take 19% income growth to return to normal affordability conditions.