Home prices keep outgaining buying power, tank affordability to recent low

First American: Stubborn price increases, even in cooling markets, continue to challenge buyers

It’s a good thing that rates are trending downward, because according to First American Financial Corp., affordability in November plunged to depths the market hasn’t plumbed more than three decades.

That’s according to the company’s Real House Price Index (RHPI), which measures the price changes of single-family homes adjusted for how income and interest rate changes affect consumer buying power. The index jumped 11% year over year in November, driven by an annual uptick of 0.6 percentage points in the 30-year fixed mortgage rate and a 7.7% year-over-year rise in nominal home prices.

Adjusted consumer homebuying power, according to the RHPI, decreased 3.3% yearly as median household earnings simply haven’t kept up with gains in prices and rates. Taking the adjustment in consumer homebuying power into account, house prices are 7.7% above their 2006 housing boom peak.

“For homebuyers, 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,” said Mark Fleming, chief economist at First American. “Even though household income increased 3.4% since November 2022 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices.”

Even with mortgage rates remaining heightened for some time now, it’s the impact of persistently buoyant home prices that has stood out to Fleming.

“Nationally, house prices reached their peak in May of last year before gradually declining to a low point in November 2022. Since then, house prices have resumed an upward trend as housing demand continues to outpace supply,” said Fleming. “Despite affordability challenges driven by elevated mortgage rates, November 2023 data indicates that home prices reached a new peak for the tenth month in a row.”

During November, prices had declined from their recent peaks in just 15 of the top 50 markets tracked by First American. And even in those cooling markets, prices have still heated up over the past year.

Take Sacramento, for example. California’s capital is among the cities with starkest price drops between peak to November. Home prices dropped over 8% from April 2022 until early 2023, but home prices in Sacramento have regained an upward trend since. In November, the housing market in Sacramento was overvalued by approximately $217,000, per First American’s data.

Inventory woes, exacerbated by the lock-in effect spurred on by high rates, continue to keep the price needle fixed firmly upward.

“While the general expectation was that a higher mortgage-rate environment would prompt house prices to adjust downward, the lack of housing supply has kept a floor on how low prices can go,” Fleming said.


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