Affordability Falls to 13-Year Low

First American Financial Corporation’s October 2021 Real House Price Index (RHPI) has found that a rise in mortgage rates and record year-over-year nominal house price growth spurred a near 20% rise in the RHPI.

First American’s RHPI 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 metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 1.7% between September 2021 and October 2021, and increased 0.6% year-over-year.

While unadjusted house prices are now 39.7% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 34.7% below their 2006 housing boom peak.

“The soaring nominal house prices and uptick in mortgage rates swamped any affordability gains from the 3.6% yearly increase in household income,” said Mark Fleming, Chief Economist at First American. “Since we know real estate is local, house-buying power and nominal house price gains vary by city, begging the question, where is affordability declining the most?”

Regionally, the five U.S. markets with the greatest year-over-year decline in affordability were:

• Phoenix (+33.7 percent)
• Charlotte, North Carolina (+32.3 percent)
• Tampa, Florida (+30.9 percent)
• Jacksonville, Florida (+29.3 percent)
• Memphis, Tennessee (+27.5 percent)

The study noted that mortgage rates increased 0.2 percentage points relative to one year ago, which reduces affordability, all else held equal. However, household income growth and nominal house prices vary by market, thus creating the market-level variance in affordability.

As noted by Fleming, “Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from higher household income.”

Of the markets that experienced the greatest year-over-year decline in affordability, Phoenix suffered the greatest year-over-year loss in affordability in October, due in part to a 34% annual increase in nominal house price growth. The area experienced strong investor activity and strong net-in migration, thus fueling a soaring demand for homes despite a limited supply for sale.

“If affordability falls too far, some home buyers on the margin will pull back, prompting fewer bidding wars and causing house prices to moderate,” said Fleming. “In the near term, a labor market characterized by high demand, but limited supply means upward pressure on wages as employers compete to attract employees. While mortgage rates are expected to increase in 2022 as the economic recovery continues, consensus expectations still put them below 4%.”

As Fleming notes, the challenge for home buyers in 2022 will mirror 2020 and 2021–you can’t buy what’s not for sale even if you can afford to.

Click here to read more on First American Financial Corporation’s October 2021 RHPI.