Affordability remains a challenge amid market slowdown

Home prices are unlikely to fall anytime soon, says economist.

The First American Real House Price Index report, which measures price changes of single-family properties throughout the US adjusted for multiple factors, increased by 32.5% year over year in March – the fastest growth in the series’ more than 30-year history, according to analysts.

The report adjusts price changes for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels – thereby also serving as a measure of housing affordability.

This rapid annual decline in affordability is attributable to two factors: a 21.6% annual increase in nominal house prices and more than a full-percentage-point increase in the 30-year fixed mortgage rate compared with one year ago, First American’s chief economist Mark Fleming said.

While household income increased 4.9% since March 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices, Fleming added.
The economist explained that reduced affordability prompts some buyers to pull back from the market and sellers to adjust their price expectations. “The housing market is slowing down by design as the Federal Reserve tightens monetary policy in order to tame inflation,” Fleming said.

“Early data signals the housing market is normalizing – our preliminary nominal house price index for the months of April and May indicates annual house price growth is decelerating. Historical data provides helpful perspective on how house prices react to rising mortgage rates.”

Rising mortgage rates and declining affordability have been two of the defining trends of the 2022 housing market, Fleming noted. Yet mortgage rates and their effect on home prices may not be as straightforward as many think.

He added: “More often than not, house price appreciation has been resistant to rising mortgage rates. One exception is the 1994 rising-rate era, when house prices declined slightly and briefly. Another exception is the 2005-06 period, otherwise known as the US housing bubble, when house prices peaked in early 2006 and started to decline through 2006 and 2007. The rising rate period during the housing bust of 2008 and 2009 is another key exception.”

He advised market watchers not to expect home prices to fall anytime soon: “History has shown that rising mortgage rates may take the steam out of rising house prices, but they don’t necessarily trigger a decline. In today’s housing market, demand for homes continues to outpace supply, which is keeping the pressure on house prices, so don’t expect house prices to decline.”

The bottom line is that supply-demand imbalance is keeping the pressure on, Fleming noted: “House prices don’t fall just because mortgage rates rise. Rising mortgage rates do influence house prices, but broader economic conditions are often more influential.

“The Federal Reserve is purposely trying to slow the housing market in order to tame inflation, and early indications, based on our preliminary house price index, signal a normalizing housing market,” he said.

“History has shown that rising mortgage rates may take the steam out of rising house prices, but they don’t necessarily trigger a decline. In today’s housing market, demand for homes continues to outpace supply, which is keeping the pressure on house prices, so don’t expect house prices to decline,” Fleming concluded.

Key highlights of the price index include:  
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• Real house prices increased 6.7% between February 2022 and March 2022.
• Real house prices increased 32.5% between March 2021 and March 2022.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 4.6% between February 2022 and March 2022, and decreased 8.3% year over year.
• Median household income has increased 4.9% since March 2021 and 70.8% since January 2000.

• Real house prices are 12.0% more expensive than in January 2000.
• While unadjusted house prices are now 50.8% above the 2006 housing boom peak, real, house-buying power-adjusted house prices remain 21.1% below their 2006 housing boom peak.  
• The five states with the greatest year-over-year increase in the RHPI are: Florida (+46.7%), South Carolina (+46.1%), Georgia (+40.5%), Arizona (+39.7%), and Idaho (+37.7%).
• There were no states with a year-over-year decrease in the RHPI.  
• Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Charlotte, N.C. (+46.6%), Raleigh, N.C. (+43.5%), Tampa, Fla. (+43.3%), Phoenix (+42.0%), and Jacksonville, Fla. (+41.2%).

• Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.