The sudden upturn of mortgage interest rates dropped affordability by 2.6% between September and October, snapping a four-month streak of improving buyer conditions, according to First American Financial Corp.

Affordability, by First American’s analysis, remains 11% higher than it was in October of last year, thanks to a 3.4% annual uptick in nominal household income and a year-over-year improvement of 1.2 percentage points in the average 30-year fixed mortgage rate. Despite a nominal home price appreciation of 3.8% (a record high), it wasn’t enough to counter the affordability improvement from higher earnings and lower rates, even if October’s affordability gain couldn’t keep up with the gains in recent months.

The affordability picture looks considerably less rosy compared to historical norms. As measured by First American’s proprietary Real Home Price Index (RHPI), affordability is still 39% below pre-pandemic historical averages. Per First American’s report, unsurprisingly, the direction of affordability going into next year and beyond will be heavily dependent on what happens with mortgage rates. October’s RHPI data was calculated with an average 30-year fixed rate at 6.4%; the increase in rates from the previous month, when rates were at 6.18%, dropped house-buying power by more than $10,000. If mortgage rates fall to 6.2% by the end of the year, affordability would rise by almost 6% relative to one year ago, increasing the share of renter households that could afford the median-priced home nationwide by almost 3 percentage points (equating roughly to just over a million renter households).

Unfortunately, the outlook for mortgage rates remains cloudy.

“Federal Reserve Chair Jerome Powell recently indicated the central bank is not in a rush to lower rates, leaving investors split on the likelihood of another 25-basis point cut in December, and calling into question the pace and extent of rate cuts in 2025,” said Mark Fleming, chief economist at First American. “More importantly, recent history suggests that the yield on the 10-year Treasury bond is less sensitive to changes in the fed funds rate and more responsive to the longer-term outlook. That means mortgage rates won’t decline significantly through the end of the year and into 2025 unless the Fed throws a curveball, such as cutting rates even more than expected, which would likely signal recession risk has risen significantly.”