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NATIONAL HOUSING AFFORDABILITY IMPROVES ANNUALLY FOR FIRST TIME IN POST-PANDEMIC
ERA
*
* Share
*
Key Points:
* National affordability improved on an annual basis for the first time since
2021.
* If mortgage rates ease further to 6 percent by the end of the year, income
growth trends towards historical average, and nominal house price growth
slows but remains positive, affordability will improve by over 7 percent by
the end of the year.
* Industry estimates predict that rates will moderate further in 2025,
improving the outlook for prospective buyers.
National affordability on an annual basis improved in August, marking the first
positive year-over-year change since 2021. Two factors drove the 4.4 percent
annual increase in affordability – a 3.1 percent annual increase in nominal
household income and a 0.57 percentage point decrease in the 30-year, fixed
mortgage rate compared with one year ago. Nominal house prices reached another
new record high in August, but annual house price appreciation slowed for the
eighth consecutive month. The increase in nominal house prices was not enough to
offset the improved affordability from lower mortgage rates and higher household
income.
> “THE POTENTIAL FOR FURTHER RELIEF IN THE COMING YEAR COULD BE A GAME CHANGER
> FOR THOSE WAITING TO ENTER THE HOUSING MARKET.”
The Fed’s Easing Cycle Begins – What it Means for Affordability
The Federal Reserve Open Market Committee (FOMC) announced a half percentage
point reduction to the benchmark federal funds rate in September, the first
reduction since they started monetary tightening in early 2022. Furthermore,
according to the summary of projections(opens in a new tab/window), the Fed
expects to reduce the base rate by an additional half percentage point this
year, but even more surprisingly by another full percentage point next year. In
other words, the Fed expects to cut the federal funds rate down to 3.4 percent
by the end of 2025, which is a much lower rate target than the 4.1 percent
target the Fed had projected in June for the end of 2025. What are the
implications for the housing market and home buyers?
This Year’s Hot Holiday Gift – Improved Affordability
The RHPI measures affordability by adjusting the First American Data & Analytics
House Price Index for purchasing power – how income levels and interest rates
influence the amount one can borrow. These factors are expected to change in the
following ways in through the remainder of 2024 and deliver the gift ever
potential home buyer wants this holiday season – improved affordability:
* Mortgage Rates Projected to Ease:
The expectation of a rate reduction has already influenced the market,
putting downward pressure on the 10-year Treasury bond yield and by loose
association mortgage rates in recent months. Now that the Fed has started
easing and signaled a more aggressive easing trajectory, mortgage rates are
likely to fall further later this year. Additionally, the spread between the
10-year Treasury yield and 30-year, fixed mortgage rate remains significantly
wider than usual, so there’s room for this spread to narrow, though it’s
unlikely to return to historical norms. If the spread narrows, then mortgage
rates could fall even further than the lower 10-year Treasury bond implies.
* Nominal House Prices Likely to Rise:
Housing demand remains strained under the pressure of elevated mortgage rates
and high prices, while for-sale inventory has increased compared to last
year’s historic lows. Sluggish demand combined with increasing supply is a
recipe for cooling home price appreciation. However, the ongoing supply
shortage puts a floor on how low house price growth can go. As a result,
annual nominal house price appreciation will likely continue to remain
positive nationally but return closer to the historical average of 3-to-4
percent.
* Income Growth Expected to Moderate:
The labor market is showing clear signs of cooling, and annual hourly wage
growth has trended lower(opens in a new tab/window) this year. The Fed’s own
projections indicate further slowing in the labor market, which should
contribute to a moderating trend of household income growth toward historical
norms.
A Cautiously Optimistic Outlook
If mortgage rates fall to 6 percent by the end of 2024, household income grows
at the pre-pandemic historical annual average of 2.9 percent, and nominal house
prices increase by 3.9 percent annually, affordability will improve by 7 percent
at the end of the year compared with one year ago. Industry estimates predict
that 2025 will bring even lower mortgage rates – the potential for further
relief in the coming year could be a game changer for those waiting to enter the
housing market.
Sources:
• First American Data & Analytics(opens in a new tab/window)
• Freddie Mac(opens in a new tab/window)
• Census Bureau(opens in a new tab/window)
August 2024 Real House Price Index Highlights
The First American Data & Analytics’ Real House Price Index (RHPI) showed that
in August 2024:
* Real house prices decreased 3.4 percent between July 2024 and August 2024.
* Real house prices decreased 4.4 percent between August 2023 and August 2024.
* Consumer house-buying power, how much one can buy based on changes in income
and mortgage rates, increased 4.0 percent between July 2024 and August 2024,
and increased 9.3 percent year over year.
* Median household income has increased 3.1 percent since August 2023 and 56.7
percent since January 2014.
* Real house prices are 32.9 percent more expensive than in January 2000.
* Unadjusted house prices are now 62.4 percent above the housing boom peak in
2006, while real, house-buying power-adjusted house prices are 6.9 percent
below their 2006 housing boom peak.
August 2024 Real House Price State Highlights
* The only states with a year-over-year increase in the RHPI are: Illinois
(+0.8 percent) and New Jersey (+0.6 percent).
* The five states with the greatest year-over-year decrease in the RHPI are:
Colorado (-12.5 percent), Oregon (-10.7 percent), Hawaii (-8.5 percent),
Arizona (-8.3 percent), and Texas (-8.2 percent).
August 2024 Real House Price Local Market Highlights
* Among the Core Based Statistical Areas (CBSAs) tracked by First American Data
& Analytics, the five markets with the greatest year-over-year increase in
the RHPI are: Buffalo, N.Y. (+3.2 percent), Cincinnati (+2.2 percent),
Milwaukee (+2.0 percent), Providence, R.I. (+1.6 percent), and Louisville,
Ky. (+1.2 percent).
* Among the Core Based Statistical Areas (CBSAs) tracked by First American Data
& Analytics, the five markets with the greatest year-over-year decrease in
the RHPI are: Tampa, Fla. (-14.0 percent), Denver (-12.4 percent), Portland,
Ore. (-11.7 percent), Raleigh, N.C. (-11.6 percent), and San Francisco (-10.1
percent).
Next Release
The next release of the First American Data & Analytics’ Real House Price Index
will take place the week of October 28, 2024.
About the First American Data & Analytics’ Real House Price Index
The traditional perspective on house prices is fixated on the actual prices and
the changes in those prices, which overlooks what matters to potential buyers -
their purchasing power, or how much they can afford to buy. First American Data
& Analytics’ proprietary Real House Price Index (RHPI) adjusts prices for
purchasing power by considering how income levels and interest rates influence
the amount one can borrow.
The RHPI uses a weighted repeat-sales house price index that measures the price
movements of single-family residential properties by time and across
geographies, adjusted for the influence of income and interest rate changes on
consumer house-buying power. The index is set to equal 100 in January 2000.
Changing incomes and interest rates either increase or decrease consumer
house-buying power. When incomes rise and mortgage rates fall, consumer
house-buying power increases, acting as a deflator of increases in the house
price level. For example, if the house price index increases by three percent,
but the combination of rising incomes and falling mortgage rates increase
consumer buying power over the same period by two percent, then the Real House
Price index only increases by 1 percent. The Real House Price Index reflects
changes in house prices, but also accounts for changes in consumer house-buying
power.
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. © 2024 by First
American. Information from this page may be used with proper attribution.
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By Mark Fleming
September 30, 2024
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