Key Points:

• National affordability improved on an annual basis in December.
  
  
• If mortgage rates ease to 6.5 percent by the end of the year, income growth trends lower but remains positive, and nominal house price growth moderates, affordability will improve a modest 2 percent by the end of the year.
  
  
• Even with a potential 2 percent improvement by year end, affordability will still be more than 70 percent lower than in December 2019. 

Affordability ended 2024 on a positive note, improving 1.2 percent on an annual basis and 0.9 percent on a month-over-month basis. Two factors contributed to the annual improvement in affordability – nominal household income increased 4.0 percent and the average 30-year, fixed mortgage rate decreased by 0.10 percentage points compared with one year ago. Nominal house price appreciation remained stable at 3.8 percent in December. The increase in nominal house prices was not enough to offset the improved affordability from lower mortgage rates and higher household income. 

Unfortunately, mortgage rates have drifted higher in January. A resilient labor market, strong economy, and persistent inflation have reduced the Federal Reserve’s urgency to cut rates this year. Combined with heightened fiscal uncertainty, this has pushed the yield on 10-year Treasury notes higher, with mortgage rates following suit. The Fed’s cautious approach to monetary easing has resulted in higher mortgage rate expectations for 2025, which have important implications for affordability.

“The outlook for affordability in 2025 looks like déjà vu all over again – another Groundhog Day for home buyers – but this time with just a glimmer of sunlight breaking through the clouds.”   

Groundhog Day for Affordability and Home Buyers

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 currently expected to change in the following ways in 2025:

• Mortgage Rates Projected to Remain Elevated:
  Recent data suggest that neither the economy nor inflation pressures have softened as much as expected, which could imply that current monetary policy is not as restrictive as previously thought. Consequently, the ‘neutral’ short-term interest rate may be higher than anticipated by the bond market and the Federal Reserve. The Fed's Q4 Summary of Economic Projections (SEP) shows an upward shift in future short-term rates, with the median participant expecting the short-term rate to be 3.9 percent by the end of 2025, up from 3.4 percent in the September SEP.
  
  Expectations of a ‘higher-for-longer’ rate environment have already influenced the market, putting upward pressure on the 10-year Treasury bond yield and sending mortgage rates back above 7 percent. Nevertheless, there is some room for rates to come down gradually as the Fed is still expected to cut rates later this year in an effort to return policy to a more neutral stance, and with more clarity around the Fed’s monetary outlook. An average of industry forecasts indicates that mortgage rates are currently expected to gradually decline to 6.5 percent by the end of the year.
  
  
• Nominal House Prices to Slow:
  In December, according to Zillow, for-sale inventories were up 18 percent from one year ago, though still 24 percent below December 2019 levels. Meanwhile, the pace of new listing growth has flattened and is only up approximately one percent compared to a year ago. Rising active inventory may mean demand has cooled, and homes are taking longer to sell, rather than a surge in new listings. For example, the time it takes for a home to go from ‘listed’ to ‘pending’ has increased from 44 to 55 days over the course of the year.
  
  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 historically low levels. 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 pre-pandemic historical average of 3.4 percent. 
  
  
• Income Growth Expected to Moderate:
   Nonfarm payrolls ended the year strong, but signs of cooling persist. Payroll growth averaged 165,000 in the second half of 2024, down from 207,000 in the first half. Additionally, annual hourly wage growth slowed in 2024. The Fed projects further labor market slowing, which should moderate household income growth, but still slightly outpace nominal house price growth, which could slowly help to improve affordability, even in a higher rate environment.

If these dynamics play out as expected, the result will be a modest 2 percent improvement in affordability by the end of the year. While any improvement is welcome, affordability will remain over 70 percent worse than in pre-pandemic December 2019. Some areas with higher active inventory levels, particularly in the Sunbelt, may see more significant improvement. The outlook for affordability in 2025 looks like déjà vu all over again – another Groundhog Day for home buyers – but this time with just a glimmer of sunlight breaking through the clouds. 

Sources:

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

December 2024 Real House Price Index Highlights

The First American Data & Analytics’ Real House Price Index (RHPI) showed that in December 2024:

• Real house prices decreased 0.9 percent between November 2024 and December 2024. 
  
  
• Real house prices decreased 1.2 percent between December 2023 and December 2024.
  
  
• Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, increased 1.3 percent between November 2024 and December 2024, and increased 5.0 percent year over year.
  
  
• Median household income has increased 4.0 percent since December 2023 and 59.2 percent since January 2014.
  
  
• Real house prices are 35.5 percent more expensive than in January 2000.
  
  
• Unadjusted house prices are now 64.1 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 5.2 percent below their 2006 housing boom peak. 

December 2024 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: Wyoming (+7.0 percent), Rhode Island (+7.0 percent), South Dakota (+6.5 percent), New Hampshire (+6.1 percent), and Illinois (+4.8 percent).
  
  
• The five states with the greatest year-over-year decrease in the RHPI are: Florida (-7.1 percent), Colorado (-6.1 percent), Texas (-6.1 percent), Mississippi (-5.5 percent), and Hawaii (-4.9 percent).

December 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: Louisville, Ky. (+10.1 percent), Buffalo, N.Y. (+8.2 percent), Providence, R.I. (+7.5 percent), Cincinnati (+6.0 percent) and Pittsburgh (+5.1 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. (-17.5 percent), Raleigh, N.C. (-9.3 percent), San Diego (-7.5 percent), Jacksonville, Fla. (-7.2 percent) and Orlando, Fla. (-6.1 percent).

Next Release

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of February 24, 2025.

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. © 2025 by First American. Information from this page may be used with proper attribution.