Affordability Hits Lowest Point In Three Decades

As home prices spike and interest rates stay elevated, affordability has fallen to its lowest point in more than three decades.

First American Financial’s Real House Price Index soared by 16.9% YOY in July, the latest available data, and was up 2% from the month prior.

But consumer buying power sank, down 1% month-over-month and 11% YOY.

The RHPI is controlled for house-buying power, measuring the impact of income and interest rate changes, and therefore acts as a measure of housing affordability as well as price changes.

The increase was driven by house prices and the 30-year fixed-rate mortgage rate rising 4% and 1.4% YOY, respectively.

The median existing-home sale price was $345,000, while the median house-buying power was just $337,000. In a market with healthy home values, buying power should equal or exceed sale prices.

Currently, just about half of the markets tracked by First American are overvalued by that metric, and some by wide margins. In San Jose, CA, the median sale price (~$1,440,000) is nearly double house-buying power ($700,000).

“For home buyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income. Even though household income increased 3.7% since July 2022 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices,” Mark Fleming, chief economist at First American, said.

In the messy aftermath of the pandemic, workers have been able to command higher wages through negotiation and job changes, but those improvements have been wiped out by inflation in many parts of the country. In the West, for example. average hourly wages for private-sector workers are up 15% from January 2020, but, after inflation adjustment, are actually down 2%.

Fleming did note that there are many markets where buyers still have the upper hand, however, with Detroit, Philadelphia, and Cleveland all undervalued by an average of $126,000.

Plus, positive changes are on the horizon. Though house prices are likely to keep trending up, mortgage rates should stabilize as the Fed puts hikes on hold heading into 2024, and wages should continue rising.

“The outlook for affordability will depend on the tug-of-war between these factors,” Fleming said.

“Lower nominal house prices, lower mortgage rates, higher incomes, or some combination of the three are the only ways to bring more affordability to the housing market.”