First American: Housing affordability drops to lowest point since 2007

The latest Real House Price Index (RHPI) report from First American Financial Corp. offered further confirmation that affordability is one of the U.S. housing market’s biggest issues.

The RHPI, which measures the price changes of single-family properties and adjusts them for the impacts of income and interest rates, vaulted 45.6% year over year in April — the biggest annualized jump in the history of the series. Month over month, real house prices grew by 11.4%, also the largest increase on record.

Real house prices are now 24.3% higher than they were in January 2000, when the series was benchmarked. Consumer homebuying power fell 8.7% monthly and 16.7% yearly in April. Affordability has now fallen to the lowest level since 2007, which is due to a pair of pressures, according to First American chief economist Mark Fleming.

“This rapid annual decline in affordability was driven by two factors: a 21.2% annual increase in nominal house prices and a 1.9 percentage-point increase in the average 30-year fixed mortgage rate compared with one year ago,” Fleming said.

The current environment is leaving few opportunities to counterbalance the headwinds.

“For homebuyers, there are few options to mitigate the loss of affordability caused by the increase in mortgage rates and home prices,” Fleming added. ”One way to offset the decline in affordability is with an equivalent, if not greater, increase in household income. Household income increased 5% since April 2021 and boosted consumer house-buying power, but even the strong year-over-year income growth was not enough to offset the affordability loss from higher rates and fast-rising nominal prices.”

Another option, Fleming said, is to opt for an adjustable-rate mortgage, which has grown in popularity as mortgage rates have spiked.

“However, real estate is local and house-buying power and nominal house prices vary by city, so it’s helpful to know where affordability is declining the most and the least,” he said.

Affordability fell year over year in each of the 50 markets tracked by First American, with Charlotte (where the RHPI rose 62.5%) seeing the largest decline thanks to strong investor movement and scarce supply. Home-price appreciation in Tampa (59.6% year-over-year increase in RHPI) actually surpassed that of Charlotte, but gains in household income helped to offset the pricing hit. Raleigh (59.6%), Orlando (56.2%) and Phoenix (56.1%) rounded out the top five cities with the largest declines in affordability.

Virginia Beach, Virginia (28.5%) saw the smallest annualized decrease, followed by Detroit (29.9%); Portland, Oregon (30.7%); Boston (31.4%); and Louisville, Kentucky (32.5%).


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