Affordability Declines to Lowest Level Since 2007, According to First American Real House Price Index

—The pandemic-driven supply and demand imbalance that fueled historically strong house price appreciation is coming to an end as the housing market rebalances to a new normal, says Chief Economist Mark Fleming—

First American Financial Corporation (NYSE: FAF), a 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 April 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 45.6 percent

“In April 2022, the RHPI jumped up by 45.6 percent compared with a year ago, accelerating faster than any other point in the 30-year history of the series,” said Mark Fleming, chief economist at First American. “This rapid annual decline in affordability was driven by two factors: a 21.2 percent annual increase in nominal house prices and a 1.9 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago.

“For home buyers, there are few options to mitigate the loss of affordability caused by the increase in mortgage rates and home prices. One way to offset the decline in affordability is with an equivalent, if not greater, increase in household income,” said Fleming. “Household income increased 5.0 percent since April 2021 and boosted consumer house-buying power, but even the strong year-over-year income growth was not enough to offset the affordability loss from higher rates and fast-rising nominal prices. Alternatively, another option for home buyers to mitigate the loss of affordability is to switch to an adjustable-rate mortgage with a lower rate than the fixed-rate benchmark. In fact, the share of adjustable-rate mortgages relative to fixed-rate mortgages has grown as mortgage rates have increased in recent months.

“In April, affordability on both a year-over-year and month-over-month basis declined at its fastest pace in the series’ history,” said Fleming. “However, real estate is local and house-buying power and nominal house prices vary by city, so it’s helpful to know where affordability declining the most and the least.”

The Five Cities Where Affordability Declined the Most and the Least

“Affordability declined year over year in all of the 50 markets we track in April. Mortgage rates increased 1.9 percentage points relative to one year ago, which reduces affordability, all else held equal. Higher mortgage rates decrease affordability equally in each market as mortgage rates are generally similar across the country,” said Fleming. “However, household income growth and nominal house prices vary by market, creating the geographic variance in affordability. Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from higher household income.”

Where Affordability Declined the Most Year Over Year

1. Charlotte, N.C. (+62.5 percent)
2. Tampa, Fla. (+59.6 percent)
3. Raleigh, N.C. (+59.6 percent)
4. Orlando, Fla. (+56.2 percent)
5. Phoenix (+56.1 percent)

Where Affordability Declined the Least Year Over Year

1. Virginia Beach, Va. (+28.5 percent)
2. Detroit (+29.9)
3. Portland, Ore. (+30.7 percent)
4. Boston (+31.4 percent)
5. Louisville, Ky. (+32.5 percent)

Impact of Household Income Growth

“In April, affordability declined the most year over year in Charlotte, N.C., mostly due to the nearly 28 percent annual increase in nominal house price growth. The strong investor activity and net-in migration in Charlotte increased demand for homes against a limited supply of homes for sale,” said Fleming. “The second greatest year-over-year decline in affordability occurred in Tampa, Fla., but was driven by annual nominal house price growth of 37 percent, a greater increase in house prices than in Charlotte.

“Comparing the decline in affordability in Charlotte with Tampa illustrates the importance of shifts in household income. While annual house price appreciation in Tampa outpaced that of Charlotte, the decline in affordability was tempered by growth in household income,” said Fleming. “Ultimately, the common dynamic across all 50 markets tracked in the RHPI is that nominal house price appreciation outpaced house-buying power.

“In the markets where affordability declined the least, nominal house price growth was slower and household income growth was strong,” said Fleming. “For example, in Virginia Beach, Va., nominal house price growth was 14.5 percent in April, while annual household income growth reached double digits, further highlighting how rising income can help to mitigate the affordability loss from rising rates and higher house prices.”

What Do These Dynamics Mean Looking Ahead?

“Housing affordability is rapidly declining, and our preliminary nominal house price index estimates for May and June indicate that house price growth is already moderating as potential buyers are pulling back from the market,” said Fleming. “The pandemic-driven supply and demand imbalance that fueled historically strong house price appreciation is coming to an end as the housing market rebalances to a new normal. Yet, the rebalancing will differ from city to city based on localized shifts in supply and demand and income levels.”

April 2022 Real House Price Index Highlights

• Real house prices increased 11.4 percent between March 2022 and April 2022.
• Real house prices increased 45.6 percent between April 2021 and April 2022.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 8.7 percent between March 2022 and April 2022, and decreased 16.7 percent year over year.
• Median household income has increased 5.0 percent since April 2021 and 71.3 percent since January 2000.
• Real house prices are 24.3 percent more expensive than in January 2000.
• While unadjusted house prices are now 52.9 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 12.3 percent below their 2006 housing boom peak.

April 2022 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: Florida (+64.1), South Carolina (+60.5 percent), Arizona (+54.1 percent), Georgia (+52.8), and Connecticut (+51.5 percent).
• There were no states with a year-over-year decrease in the RHPI.

April 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. (+62.5), Tampa, Fla. (+59.6 percent), Raleigh, N.C. (+59.6 percent), Orlando (+56.2 percent), and Phoenix (+56.1 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 July 18, 2022 for May 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 a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 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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