Affordability Crunch Likely Unchanged Through End of the Year

Apart from the fall of 2023, affordability in May reached its lowest level in over three decades. On a year-over-year basis, affordability declined by nearly 9 percent. Two factors drove the sharp annualized drop in affordability – a 5.9 percent annual increase in nominal house prices, according to our First American Data & Analytics House Price Index, and a 0.6 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago. For home buyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income. Even though household income increased 4.1 percent since May 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices. 

At the beginning of the year, we predicted affordability may end 2024 modestly higher than at the end of 2023. This forecast was based on the industry consensus at the time that mortgage rates would fall to 6.25 percent and house prices would slow to 3.7 percent by the end of 2024. Unfortunately, inflation has proven stubborn and led to the Federal Reserve’s “higher-for-longer” stance on interest rates, contributing to an elevated outlook for mortgage rates, while house prices have once again demonstrated their “downside stickiness.” 

 

“While affordability is likely to remain constrained for the remainder of 2024, mortgage rates are widely expected to come down in 2025, which would be welcome news for potential home buyers.” 

Mid-Year Outlook for Affordability: Little Change Expected


The Real House Price Index (RHPI) measures affordability by adjusting the First American Data & Analytics House Price Index for purchasing power by considering how income levels and mortgage rates influence the amount home buyers can borrow. Examining how each of these factors may change provides insight into the outlook for affordability for the remainder of 2024.

Income Growth Expected to Moderate


The labor market continued to impress in May, as rising wages resulted in higher household income. Annual hourly wage growth increased by 4.1 percent compared with a year earlier, job growth remained steady, and the unemployment rate stayed low. The increase in wage growth contributed to a 4.1 percent year-over-year increase in median household income. The labor market continues to face a labor shortage, putting upward pressure on wages, and therefore household income, but that shortage has narrowed significantly from the peak of 2022. The labor shortage is likely to narrow further and perhaps disappear by the end of 2024, which should slow the pace of wage growth and household income toward historical norms.

 

Mortgage Rates Projected to Retreat from 2023 Peak, but Remain Elevated


Mortgage rates reached a recent peak of 7.6 percent in October 2023, but have since drifted lower to 7 percent in May. Average industry forecasts project that mortgage rates will end 2024 at approximately 6.7 percent, as inflation is expected to recede, and the Fed is expected to cut interest rates at least once.

Nominal House Prices Likely to Rise


The housing market continues to suffer from an imbalance between housing supply and demand, which puts upward pressure on prices. However, a recent increase in inventory, coupled with a pullback in demand due to affordability constraints, has softened annual house price growth. The deceleration is likely to persist for the remainder of the year. As a result, the average of different industry forecasts suggests annual house price growth to slow to 4.6 percent by the end of 2024.

Decomposing the Drivers of Affordability, Graph

 

Affordability Relief Unlikely Until 2025


Assuming that mortgage rates fall to 6.7 percent by the end of 2024, household income grows at the pre-pandemic, 10-year historical average of 3.3 percent, and nominal house prices increase by 4.6 percent annually, then affordability as measured by the RHPI will end the year essentially flat compared to the end of 2023. At this level, affordability will remain 45 percent worse than in February 2022, just before the Fed started increasing rates. While affordability is likely to remain constrained for the remainder of 2024, mortgage rates are expected to come down in 2025, which would be welcome news for potential home buyers. 

 

 

Sources:

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

 

 

May 2024 Real House Price Index Highlights

 

The First American Data & Analytics’ RHPI showed that in May 2024:

  • Real house prices increased 0.6 percent between April 2024 and May 2024. 
  • Real house prices increased 8.7 percent between May 2023 and May 2024.
  • Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 0.3 percent between April 2024 and May 2024, and decreased 2.5 percent year over year.
  • Median household income has increased 4.1 percent since April 2024 and 91.5 percent since January 2000.
  • Unadjusted house prices are now 59.8 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 2.3 percent above their 2006 housing boom peak. 
  • Real house prices are 46.3 percent more expensive than in January 2000.

 

May 2024 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: West Virginia (+23.2 percent), Illinois (+16.0), Rhode Island (+15.6 percent), Vermont (+15.3 percent), and New Jersey (+15.1 percent).
  • •    There were no states with a year-over-year decrease in the RHPI.

 

May 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: Memphis, Tenn. (+18.0 percent), Cincinnati (+17.8 percent), Providence, R.I. (+16.4 percent), Seattle (+16.1 percent), and Boston (+15.5 percent).
  • Among the Core Based Statistical Areas (CBSAs) tracked by First American Data & Analytics, Denver (-1.4 percent) was the only market with a year-over-year decrease in the RHPI.

Next Release

 

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of July 29, 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.