Home Affordability Continues to Decline

First American Financial Corporation released its July report for the Real House Price Index (RHPI), which measures the change in single-family home prices while taking into account income and interest rates to determine home affordability and home-buying power.

According to the report, affordability is down from June to July, 0.4 percent month-over-month and 4.2 percent year-over-year. Real home prices increased 0.6 percent month-over-month, and 10.4 percent year-over-year. Although, according to Mark Fleming, Chief Economist at First American, this effect doesn’t translate to all homeowners.

“Rising rates and rapid price appreciation driven by the lack of supply caused affordability to decline in July … But, the loss in affordability is only significant to potential first-time buyers,” said Fleming. “Existing homeowners with fixed-rate mortgages benefited from the rising prices with increased equity.”

Still, real home prices are still 38.4 percent lower than they were during the housing peak in July 2006, according to the report, and 17.2 percent below the levels experienced at the beginning of 2000.

On an unadjusted scale, home prices increased year-over-year 5.8 percent, and stand at 3.4 percent higher than the peak experienced in 2007. Looking forward, Fleming doesn’t see a change in the shallowing affordability trend.

“As mortgage rates rise and supply remains constrained, affordability will continue to decline for those seeking to achieve the goal of homeownership,” said Fleming. “Yet, while affordability is lower than a year ago, it remains high by historic standards.”

The report accounts for a few reasons why affordability continues to drop, one of which being that inventory continues to be restricted on account because homeowners are afraid to sell their home in the event they cannot find a replacement.

For the full report, click here.