What’s Increasing Consumer Home-Buying Power?

First American Financial Corporation’s recently released its July 2020 First American Real House Price Index (RHPI). The RHPI analyzes the fluctuations in price of single-family properties throughout the nation. The data is adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels. Many in the home industry use this analysis as a measuring stick of current housing affordability.

The bottom line from the analysis revealed that rates are falling and income is rising, a perfect storm that aided to offset nominal house appreciation in the month of July. First American’s Chief Economist Analysis Mark Fleming offered his expert analysis and professional insights into what exactly was found in the data, and what it all means—now and in the future.

According to Fleming, affordability greatly improved during July: “Affordability improved in July as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of increased affordability, outpacing the rise in nominal house price appreciation. The average 30-year, fixed mortgage rate fell by 0.75 percentage points and household income increased 5.5 percent compared with July 2019.”

Fleming added how this dynamic directly affect what he calls house-buying power: “Declining mortgage rates and rising household income levels both increase consumer house-buying power. So, even though nominal house price appreciation jumped 8.2% annually in July, it was not enough to offset the affordability boost from declining rates and rising household income.”

Fleming made no bones about how the recent recession due to the pandemic has (and still is) directly affecting the market as well: “While there remains debate regarding the actual end date of the 2020 recession, there is no argument that the economic pain inflicted by the coronavirus continues to linger. Yet, housing affordability nationally has improved, and the housing market remains resilient.”

Fleming then addressed the question as to whether or not this trend will continue: “Nominal house price appreciation is showing no signs of slowing down, as supply and demand imbalances persist. While mortgage rates have, thus far, won the affordability tug-of-war nationally, some housing markets are beginning to feel the impact of pandemic-driven job losses on household income levels. In these markets, accelerating house price appreciation, in conjunction with flat or falling income levels, is dragging affordability down. The lesson? Affordability is resilient in the face of economic downturns, but just how resilient depends on the dynamics of mortgage rates, income, and house price appreciation.”