First American: Housing market affordability at breakeven point

Affordability down 5% year over year, per company's Real House Price Index

The housing market is “nearly overvalued” on a national level, according to the March Real House Price Index (RHPI) report from First American Financial Corp.

Home prices are regularly reported without adjusting for inflation, but the RHPI tracks those price shifts and adjusts for the impact of income and interest changes. Because of this, First American touts the index as an accurate measure of housing affordability — affordability that fell by 0.1% month over month and 5% on an annual basis, according to the RHPI.

“Two factors drove the year-over-year decline in affordability – a 6.2% annual increase in nominal house prices … and a 0.3-percentage-point increase in the 30-year, fixed mortgage rate compared with one year ago,” said Mark Fleming, First American’s chief economist.

“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 March 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices.”

A household with the national median income could afford to buy a $350,000 home in March, assuming a 5% downpayment with an average mortgage rate and mortgage payments at a third of its pre-tax income. That happened to be exactly the median resale price in March, according to First American’s data.

“If housing is appropriately valued, house-buying power should equal or exceed the median sale price of a home,” explained Fleming. “At a national level, the housing market is neither overvalued nor undervalued by this metric. The housing market was considered overvalued from June through November of last year, then modestly undervalued until March, when the median sales price and house-buying power equalized. However, examining this metric at the market level paints a more affordable picture.”

Whether affordability dips over or under that breakeven point, Fleming said, will depend on the reactions of supply and demand to the ongoing “higher for longer” status quo.

“As ‘higher-for-longer’ mortgage rates are increasingly likely, sellers have less incentive to sell, keeping inventory short and, all else equal, pushing prices higher. But that’s only half the story in a ‘higher-for-longer’ world,” he said. “House-buying power is also reduced, which can soften demand, so it’s not a certainty that prices continue to march upward. Whether affordability drifts over or under in the coming months will depend on whether the supply-tightening response to higher rates is stronger or weaker than the demand-softening response.”


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