Home price growth slowed in May, showing signs of a cooling housing market. But housing is the least affordable it has been since the mid-1980s as mortgage rates rise and home values soar, driven by low housing inventory, a new Black Knight report suggests.

The annual home price growth index, measured by Black Knight, grew 19.3% in May from a revised 20.4% in April marking the largest single-month deceleration since 2006. Prices, however, are still up 1.5% month over month, which is nearly twice the historical average for May, according to Black Knight’s monthly mortgage monitor report.

“While any talk of home values and 2006 might set off alarm bells for some, the truth is that price gains would need to see deceleration at this rate for more than 12 months just to get us back to a ‘normal’ 3-5% annual growth rate,” said Ben Graboske, data and analytics president at Black Knight. “That said, the pace of deceleration could very well increase in the coming months, as we’ve already begun to see in select markets such as Austin, Boise and Phoenix.”

The strongest deceleration was in Austin, Texas where home price growth rate dropped 12.2 percentage points followed by Boise, Idaho (-12.1 percentage points) and Spokane, Washington (-7.1 percentage points), all of which saw significant home price growth in recent years, according to Black Knight.

While 97 of the nation’s 100 largest markets saw home price growth slowing, affordability is at its worst point since the mid-1980s, when sharp hikes by the Federal Reserve led to double-digit mortgage rates, which often resulted in greater than 50% payment-to-income ratio.

Back then, affordability pressures were almost entirely rate-driven and incomes largely kept up with home price growth, the report said. Today’s falling affordability is due to rising rates and soaring home values largely driven by low inventory levels.

The average home price is now more than six times the median household income. As of mid-June, it takes about 36% of the median household income to make the mortgage payment on average-priced home purchase, which is well above the 34% post-1980s peak in July 2006. That payment is higher than $2,100 for the first time on record, up nearly $750 so far this year and almost double the $1,089 required at the beginning of the pandemic.

However, the largest jump in housing inventory in the past five years also was in May, as pending listings began to normalize and existing listings sat longer on the market. Despite more than 107,000 homes listed for sale in May, inventory remains at a 60% deficit. That equates to about 770,000 fewer properties on the market than there would typically be at this time of the year, according to Black Knight.

“All major markets are still facing inventory deficits, but some have seen their shortages shrink much faster than others,” Graboske said.

Among them are some of the hottest housing markets, including San Francisco and San Jose, California, and Seattle, Graboske added. “Unsurprisingly, these are also among the markets seeing the strongest levels of cooling so far this year, with annual home price growth rates in each down more than three percentage points in recent months.”

Regarding mortgage rates, rising 30-year rates have now “all but eliminated traditional rate-term refinance incentives in the market,” Black Knight’s report said.

In an 18-month span from late 2020 to the present, the market saw the population of high-quality refi candidates soar to an all-time high, near 20 million, and plunge to the lowest level since the beginning of the century.

In early 2022, some 11 million refinance candidates remained but that population fell by 95% year to date with less than 500,000 remaining as of June. According to Black Knight, most of the remaining candidates held their mortgages since 2003 or prior, suggesting a reluctance to either refinance or restart a 30-year commitment.

Rate/term locks are down 90% from the same time last year and accounted for less than 5% of rate locks on the Optimal Blue platform in May. Cash-out locks were down 42% year over year and data through mid-June suggests they’re now down even more, to 50% from the same time last year.