In April 2022, the Real House Price Index (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. 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.
“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.”
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. 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. 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. 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
- Charlotte, N.C. (+62.5 percent)
- Tampa, Fla. (+59.6 percent)
- Raleigh, N.C. (+59.6 percent)
- Orlando, Fla. (+56.2 percent)
- Phoenix (+56.1 percent)
Where Affordability Declined the Least Year Over Year
- Virginia Beach, Va. (+28.5 percent)
- Detroit (+29.9)
- Portland, Ore. (+30.7 percent)
- Boston (+31.4 percent)
- 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. 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. 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. 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. 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
The First American Real House Price Index (RHPI) showed that in April 2022:
- 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.
About the First American 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’s 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.
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.