Housing Market Adjusting to Waning Affordability, According to First American Real House Price Index

—The last two years were the exception, not the rule, and the housing market is adjusting to a not-so-new normal, says Chief Economist Mark Fleming—

First American Financial Corporation (NYSE: FAF), the premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today released the February 2022 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: Real House Prices Increase Nearly 31 percent

“In February 2022, the Real House Price Index jumped up by nearly 31 percent. That’s the fastest growth in the more than 30-year history of the series. This rapid annual decline in affordability was driven by two factors – a 21.7 percent annual increase in nominal house prices and a nearly full percentage point increase in the 30-year, fixed mortgage rate compared with one year ago,” said Mark Fleming, chief economist at First American. “Rising mortgage rates impact both housing supply and demand, limiting supply by reducing the propensity of homeowners to sell and flattening demand by reducing consumer house-buying power.

“For home buyers, the only way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income,” said Fleming. “Even though household income has increased 5.1 percent since February 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rapidly rising nominal prices.

“Rising mortgage rates and surging nominal house prices are expected to continue outpacing household income, so affordability will likely wane further nationally in the near term,” said Fleming. “One forecast, based on an estimate of when the 10-year Treasury yield will peak, suggests that the 30-year, fixed mortgage rate will likely peak between 5.0 and 5.7 percent, but may move as high as the low 6 percent range. So, let’s examine how these mortgage rate scenarios would impact house-buying power.”

Rates Above 5.5 Percent Likely in 2022

“We can use the RHPI to model shifts in income and interest rates and see how they either increase or decrease consumer house-buying power and affordability,” said Fleming. “When incomes rise and/or mortgage rates fall, consumer house-buying power increases.”

“In the latest RHPI report reflecting February 2022 data, the 30-year, fixed mortgage rate stood at 3.8 percent. Since then, rates have increased sharply, breaking the 5-percent barrier in mid-April. The increase in rates since February reduced house-buying power by $60,000,” said Fleming. “If the average mortgage rate reached 5.5 percent, assuming a 5 percent down payment and average household income of approximately $70,800, house-buying power falls by an additional $21,000. If rates increased even higher to 6.0 percent, house-buying power would fall by $40,000 compared with 5.0 percent.”

Context is Key

“Rising mortgage rates impact affordability, but historical context is important. An average 30-year, fixed mortgage rate of 5.5 percent is still well below the historical average of nearly 8 percent. Even with mortgage rates at 5.5 percent, house-buying power is over $360,000, which is still strong and at the same level as 2018,” said Fleming. “Recency bias may have many thinking that rates below 3 percent and house-buying power above $450,000 is normal, but it is anything but normal from a historical perspective. The last two years were the exception, not the rule, and the housing market is adjusting to a not-so-new normal.”

February 2022 Real House Price Index Highlights

• Real house prices increased 5.8 percent between January 2022 and February 2022.
• Real house prices increased 30.6 percent between February 2021 and February 2022.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 3.6 percent between January 2022 and February 2022, and decreased 6.8 percent year over year.
• Median household income has increased 5.1 percent since February 2021 and 70.4 percent since January 2000.
• Real house prices are 5.7 percent more expensive than in January 2000.
• While unadjusted house prices are now 48.8 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 25.8 percent below their 2006 housing boom peak.

February 2022 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: Florida (+43.1), South Carolina (+42.8 percent), Arizona (+39.0 percent), Georgia (+38.8), and Connecticut (+35.8 percent).
• There were no states with a year-over-year decrease in the RHPI.

February 2022 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: Charlotte, N.C. (+46.1), Raleigh, N.C. (+42.4 percent), Phoenix (+41.3 percent), Tampa, Fla. (+39.6 percent), and Jacksonville, Fla. (+39.1 percent).
• Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

Next Release

The next release of the First American Real House Price Index will take place the week of May 30, 2022 for March 2022 data.

Sources

• First American Data & Analytics
• Freddie Mac
• Census Bureau

Methodology

The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.

Disclaimer

Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2022 by First American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is the premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $9.2 billion in 2021, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2022, First American was named one of the 100 Best Companies to Work For by Great Place to Work^® and Fortune magazine for the seventh consecutive year. More information about the company can be found at www.firstam.com.

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