House prices increased more than 13% on a year-over-year basis, but house-buying power has grown even faster, increasing by more than 19%, saidChief Economist Mark Fleming at First American Financial Corporation. He and other economists are examining the latest home-price and affordability data and seeing trends that may, at first blush, seem contradictory, but the analysts make some sense of the situation.
Fleming this week released his January 2021 First American Real House Price Index (RHPI), which measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state, and city/metro levels. Additionally, the RHPI adjusts for house-buying power, thus serves as a housing-affordability measure.
Fleming points out in his report that those soaring nominal home prices do not tell the entire affordability story.
"It is true that nominal house prices are the highest they have ever been, over 22 percent higher than the housing boom peak in 2006,” Fleming said. “The acceleration in the pace of annual house price growth began in the summer months of 2020, as potential homebuyers emerged from lockdowns armed with record-low mortgage rates and were met by historically low housing supply—a perfect storm for rapid nominal house price appreciation.
By conventional measures of affordability, especially in an environment of modestly rising (in some markets declining) household income, a surge in nominal house prices implies significantly reduced affordability, yet, nominal house price fluctuations alone, or even the relationship between nominal house price growth and income growth, can be a misleading indicator of affordability, and overlooks what matters more to potential buyers—house-buying power—how much home one can buy based on changes in income and interest rates.
The Real House Price Index (RHPI) adjusts nominal house prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow, Fleming explained.
“The ability of low or declining interest rates to boost house-buying power makes it possible for a housing market have high or even rising nominal house prices yet remain highly affordable (as measured by the RHPI) and vice versa. Indeed, a walk down house price memory lane shows us that nominal house prices alone are not always a good measure of affordability.”
Other indexes, such as Realtor.com's Monthly Housing Trends Report show reveal similar narratives—the researchers there report more than 50% fewer homes to choose from are facing the double whammy of record-breaking prices and rising interest rates.
"In many areas of the country, there are half as many available homes for sale than a year ago—and in some markets that number increases to less than one-third. For a buyer, that means if they had 10 homes in their price range to choose from last year, they have less than five, perhaps as few as three, available to them today," said Realtor.com Chief Economist, Danielle Hale. "As a result, home prices have skyrocketed, shattering previous records. We expect to see more sellers emerge in the weeks ahead, which should give buyers more options. Homes will likely continue to sell fast, but increasing interest rates and monthly costs could slow the pace of price gains, unless we see a boost in demand from equity-rich repeat buyers."
ATTOM Data Solutions' first-quarter 2021 U.S. Home Affordability Report similarly showed those those mixed trends— homes remaining affordable but not quite as much as they have historically—happened amid a surge over the past year of homebuyers who largely escaped the economic damage caused by the pandemic. As those home seekers pursued a dwindling supply of homes for sale, prices shot up—just not enough to significantly outweigh the benefits of increased wages and average mortgage rates that sat below 3%.
"The past year certainly has been an odd one for the U.S. housing market. Home prices surged at a remarkable pace even as the virus pandemic damaged the U.S. economy, which dropped historical affordability levels. But average workers untarnished by the pandemic were still able to afford the typical home because wages and rock-bottom interest rates worked to their favor in a big way," said Todd Teta, chief product officer with ATTOM Data Solutions. "Much remains uncertain about the housing market in 2021. A lot will depend on how well the broader U.S. economy recovers from the pandemic and whether there are still many more buyers looking to escape congested neighborhoods most prone to the virus, pushing prices even higher. But for now, our data shows that average workers are able to manage the costs associated with rising values."