First American: Growth in consumer purchasing power not enough to offset affordability decline

Housing affordability sinks to lowest point in more than three decades

According to the Real House Price Index (RHPI) from First American Financial Corp., housing affordability is now at its lowest point in more than three decades.

The RHPI surged 16.9% year over year in July 2023, driven by increases in two of the three key drivers of the index. Nominal house prices grew 4% annually during the month, while the interest rate for a 30-year fixed-rate mortgage increased by 1.4 percentage points.

With these factors rising at their current pace, the only way for housing affordability to remain level for potential buyers is with a corresponding, if not greater, uptick in household income. Unfortunately for these shoppers, while household income has grown 3.7% since July 2022, the bump in consumer homebuying power wasn’t enough to counterbalance the affordability loss.

 “The median sale price of an existing home in July, according to data from First American Data & Analytics, was approximately $345,000, while the median house-buying power was nearly $337,000,” said Mark Fleming, First American’s chief economist. “If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home.”

Of the top 50 markets tracked in July by First American, 24 posted median sales prices for existing homes that surpassed the median house-buying power. That’s a big jump from the same month last year, when only 15 of these same markets were overvalued.

Unsurprisingly, the most overvalued market was in California’s pricey San Francisco Bay Area. San Jose’s median sales price was almost $1.44 million — roughly double the local consumer home purchase power of $700,000. San Jose joined fellow Golden State cities San Francisco and Los Angeles as markets with large amounts of overvaluation, and affordability in expensive cities is only getting worse. Home prices in these cities had been on the wane, but due in large part to the housing inventory shortage, prices are once again accelerating.

Meanwhile, Midwest markets are seeing some of the biggest year-over-year jumps in real house prices, with Indianapolis (where the RHPI is up 25.2% year over year) and Chicago (25.2%) leading all tracked metros. No cities tracked by First American had a year-over-year decrease in the RHPI.

“The good news is that most of the markets we track remain undervalued by this measure, and some markets remain significantly undervalued,” Fleming said. “For example, Detroit, Philadelphia and Cleveland are undervalued by an average of $126,000.”

Month over month, the affordability needle is likewise pointing south. Real house prices increased 2% from June to July, with consumer home purchase power dropping 1% over that same time frame.


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