According to the latest analysis from First American, affordability continued its rapid decline in August 2022, as the Real House Price Index (RHPI) skyrocketed 49% on an annual basis. The ongoing and swift decline in affordability was driven by a 15% increase in nominal house prices and a 2.4 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago. As affordability wanes, would-be buyers are pulling back from the market, prompting annual house price appreciation to fall from its recent peak.
Nationally, annual house price growth peaked in March at nearly 21% but has since fallen by approximately 6 percentage points to 15% in August. Nominal house price appreciation is projected to fall further as the hot sellers’ market of early 2022 turns in favor of buyers.
For homebuyers, the loss of affordability caused by a higher mortgage rate can be mitigated with an equivalent, if not greater, increase in household income or by choosing an adjustable-rate mortgage (ARM), which typically has a lower rate than a 30-year, fixed-rate mortgage. Even though higher household income and ARMs help to increase consumer house-buying power, they’re not enough to offset the affordability loss from higher rates and fast-rising nominal prices.
Peak Price Appreciation to Present
While house price appreciation in all top 50 markets has slowed from recent peaks, some markets’ growth rates have cooled faster than others. For example, the market with the strongest deceleration was Sacramento, California. Annual house price appreciation in Sacramento peaked in July 2021 at 23.5%, but has since slowed to 4.6%, reflecting a 19-percentage point difference.
The market with the smallest difference was New York. In New York, house price appreciation reached 13% on an annual basis at its peak in May 2021 and was just over one percentage point less at 11.6% in August 2022. The market with the slowest annual pace of appreciation in August was San Francisco at 1.1%, down significantly from its July 2021 pace of 17.6%. However, some markets continue to see strong house price growth. The market with the fastest pace of appreciation in August was Miami at 30%, which is only 3 percentage points below its peak of 33%in May of 2021.
House price appreciation has slowed in all 50 markets we track, but the deceleration is generally more dramatic in areas that experienced the strongest peak appreciation rates. However, price appreciation has proven more resilient in parts of Florida. Miami, Tampa, Orlando, and Jacksonville had peak house price growth rates near or above 30%, but their fall from peak has not been as severe as in other markets.
Slowing price appreciation is expected to continue as the housing market adjusts to the decline in affordability and the pandemic-era sellers’ market turns in favor of buyers. However, don’t expect a housing bust like the mid-2000s, as lending standards in this housing cycle have been much tighter and homeowners have historically high levels of home equity, so there likely won’t be a surge in foreclosures.
The next Real House Price Index will be released the week of November 28, 2022.
To read the full report, including more data and methodology, click here.