Rapid House Price Appreciation Drives Affordability Lower, According to Price Index

First American Financial Corporation

First American Financial Corporation, a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the April 2021 First American Real House Price Index (RHPI). The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

Chief Economist Analysis: Is it a Good Time to Buy a Home?

“In today’s housing market, the power is very clearly in the hands of the seller. In April, First American Data & Analytics’ nominal house price index increased 16.2 percent year over year, the fastest pace since 2005. Rapid appreciation is driving declines in affordability, despite rising incomes and lower mortgage rates,” said Mark Fleming, chief economist at First American. “Nationally, according to our Real House Price Index, housing affordability declined in April on a year-over-year basis by 7.0 percent, the most since December 2018. Furthermore, homes typically remained on the market for 17 days in April, a record low. Multiple-offer bidding wars are common across the full spectrum of home prices. So, does this mean it’s a bad time to buy a home?”

How Might Housing Affordability Shift in the Months Ahead?

“Wait for the housing market to cool down, or jump in before affordability declines further? That is the question potential home buyers are trying to answer. Buying a home is both a financial and lifestyle decision, so if an individual or family has made the lifestyle decision to buy, then it becomes a financial question,” said Fleming. “Will affordability decline in the months to come? If so, it may be a good time to buy before things get worse. Or, will buyers begin to back off, lowering the likelihood of bidding wars and causing house prices to moderate and affordability to bounce back?

“Shifts in housing supply or demand can affect affordability. If supply increases and meets demand in the middle, house prices will moderate. Unfortunately, while inventory has ticked up slightly in recent weeks, it remains near historic lows and is not enough to compensate for a decade of underbuilding and homeowners simply staying put,” said Fleming. “It will take years for supply to catch up to demand and, in the meantime, any new housing inventory will be very quickly absorbed by the existing demand. So, significant housing supply relief is unlikely in the near term.

“A substantial increase in mortgage rates could moderate demand. However, without an increase in income or a slowdown in house price growth, a rise in mortgage rates would accelerate the decline in affordability and squeeze buyers on the margin out of the market,” said Fleming. “A pull back of buyers on the margin may prompt fewer or less intense bidding wars, possibly moderating house price appreciation. Of course, even without rising mortgage rates, continued strong nominal house price growth would reduce affordability in the short run, squeezing more buyers out of the market and, eventually, reducing upward price pressure in the longer run.”

Affordability Likely to Worsen Before it Improves

“Examining each of these scenarios can provide insight into the likely direction of affordability. In April, nominal house price growth increased by 16.2 percent compared with a year ago, nearly double the 8.6 percent increase in house-buying power. For affordability to improve, house-buying power must outpace nominal house price growth. Looking ahead, consensus forecasts have mortgage rates peaking at an average of 3.4 percent by the fourth quarter of 2021,” said Fleming. “Assuming a household income of $70,000 and a 5 percent down payment, increasing from the current average mortgage rate of 3.0 percent to 3.4 percent would reduce house-buying power by nearly $24,000. All else held equal, household income would need to increase by approximately 5 percent to offset the affordability loss from rising mortgage rates. While incomes are expected to increase in the months to come as the economy continues to improve, it’s unclear if it will reach a pace necessary to offset the potential for rising mortgage rates.

“More important is the outlook for nominal house price growth. While nominal house price growth may moderate due to the affordability squeeze on buyers who are on the margin, the severe supply-demand imbalance means the housing market is unlikely to cool enough to result in a material improvement in affordability,” said Fleming. “Even if demand moderates due to an affordability squeeze, it will take time for supply to catch up with demand, keeping house price growth positive. So, should you buy now or wait? Real estate is local, and affordability will depend on where you are, but affordability is likely to worsen before it improves, so try to buy it now, if you can find it.”

April 2021 Real House Price Index Highlights

  • Real house prices increased 0.7 percent between March 2021 and April 2021.
  • Real house prices increased 7.0 percent between April 2020 and April 2021.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 1.4 percent between March 2021 and April 2021, and increased 8.6 percent year over year.
  • Median household income has increased 5.3 percent since April 2020 and 78.7 percent since January 2000.
  • Real house prices are 20.9 percent less expensive than in January 2000.
  • While unadjusted house prices are now 27.4 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 44.4 percent below their 2006 housing boom peak.

April 2021 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: Arizona (+18.3 percent), Washington (+16.1 percent), Vermont (+15.3 percent), Wyoming (+15.2 percent), and Oklahoma (+14.0 percent).
  • There were no states with a year-over-year decrease in the RHPI.

April 2021 Real House Price Local Market Highlights

  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Phoenix (+20.8 percent), Kansas City, Mo. (+20.5 percent), Seattle (+18.2 percent), Tampa, Fla. (+16.5 percent), and Hartford, Conn. (+14.6 percent).
  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, the only market with a year-over-year decrease in the RHPI is San Francisco (-0.7 percent).

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