Key Points:

• Affordability started the year poorly, but preliminary February data shows some improvement due to lower mortgage rates, slower price appreciation, and rising incomes.
  
  
• Price growth, a key driver of affordability trends, is a function of supply and demand dynamics in the housing market, which can be measured in months' supply.
  
  
• Months' supply is expected to continue to rise in 2025, further cooling price growth and improving affordability.

Affordability took a hit to start 2025, declining 2.3 percent on an annual basis and 2.3 percent on a month-over-month basis in January. Two factors contributed to the annual slump in affordability – nominal house price appreciation increased by 2.8 percent, and the average 30-year, fixed mortgage rate increased by 0.3 percentage points compared with one year ago. While nominal household income increased 3.8 percent annually, it was not enough to offset the reduced affordability from higher mortgage rates and positive price growth. However, preliminary February data shows an improvement in annual affordability due to slower price appreciation, a decline in mortgage rates and still-positive income growth. 

The RHPI measures affordability by adjusting the First American Data & Analytics House Price Index for purchasing power – how much one can buy based on changes in income and mortgage rates. The industry consensus is that mortgage rates in 2025 will remain fairly stable, between 6 and 7 percent. However, the outlook for national price appreciation and its ultimate impact on affordability in the year ahead remains uncertain. Various scenarios could play out, each influencing affordability differently, so let’s examine the implications of some likely price growth scenarios on affordability.

“In 2025, improving affordability hinges on the price being just right.”   

Keep an Eye on Months’ Supply

Months’ supply refers to the number of months it would take, based on the current sales rate, to deplete the inventory of homes for sale. This measure is often used to assess whether the current market can be characterized as a buyers’ or sellers’ market. The traditional rule of thumb suggests that around six months of supply signals a balanced market, less than six months’ supply indicates a sellers’ market, and more than six months’ supply means a buyers’ market. In a balanced market, price appreciation is not too hot, not too cold, but ‘just right.’ 

The data confirms this relationship. The chart below plots total months' supply for both new and existing homes each month from 1991 on the vertical axis, and annual nominal house price appreciation as measured by the seasonally adjusted First American Data & Analytics House Price Index on the horizontal axis. It’s clear that a strong relationship exists between the two. The chart also reveals that house prices, on average, fall annually when inventory reaches the 6.5-months' supply threshold.

Nationally, the current months' supply is 4.6, well above the February 2024 level of 3.9, when price appreciation was 6.9 percent – a market that was perhaps ‘too hot.’ Months' supply has inched higher over the last year as the inventory of both new and existing homes has rebounded from historical lows, meanwhile affordability challenges have constrained demand and, in turn, sales activity. 

As existing homeowners increasingly accept the ‘higher for longer’ mortgage rate environment and decide to list their homes for sale, it’s reasonable to expect months' supply will creep higher, further cooling price appreciation. The path of affordability in 2025 will play out differently based on how shifting months’ supply impacts house prices.

Too Hot, Too Cold, or Just Right?

Assuming mortgage rates end the year at 6.5 percent and annual household income growth slows but remains positive, the following scenarios demonstrate how affordability may shift by year end:

• Price appreciation stabilizes at 2.1 percent: The preliminary February First American Data & Analytics House Price Index indicated an annual pace of growth of 2.1 percent. If months’ supply remains near its current level, keeping annual price growth steady through the end of the year, affordability will improve by nearly 3.5 percent by the end of 2025.
  
  
• Price appreciation slows to 1.8 percent: If months' supply surges to a balanced market level of six months, house price appreciation nationally would dip to below 2 percent, which would boost year-end affordability by approximately 4 percent, all else held equal.
  
  
• Prices re-accelerate: Of course, it’s possible that home sales outpace inventory growth, which would reduce months’ supply, putting upward pressure on prices. If months’ supply trends lower to the spring 2024 level of approximately 4.2, when price growth was approximately 6 percent, then affordability would finish 2025 just a touch worse than at the end of 2024.

House Prices to Moderate, But Real Estate is Local

With inventory expected to increase further amid affordability-constrained demand, the most likely scenario is that months' supply continues to trend higher, further cooling house price growth, but not quite enough to see a price decline nationally. Of course, real estate is local, and low single-digit price growth nationally likely means prices are declining in some pockets of the country, while growing in others. Nevertheless, when analyzing the outlook for affordability, it's important to consider what months' supply can tell us about the likely future path of house prices. In 2025, improving affordability hinges on the price being ‘just right.’

Sources:

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

January 2025 Real House Price Index Highlights

The First American Data & Analytics’ Real House Price Index (RHPI) showed that in January 2025:

• Real house prices increased 2.3 percent between December 2024 and January 2025. 
  
  
• Real house prices increased 2.3 percent between January 2024 and January 2025.
  
  
• Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 2.3 percent between December 2024 and January 2025, and increased 0.5 percent year over year.
  
  
• Median household income has increased 3.8 percent since January 2024 and 59.5 percent since January 2014.
  
  
• Real house prices are 37.9 percent more expensive than in January 2000.
  
  
• Unadjusted house prices are now 63.2 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 3.6 percent below their 2006 housing boom peak. 

January 2025 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: South Dakota (+15.5 percent), Wyoming (+11.3 percent), Rhode Island (+8.9 percent), North Dakota (+8.8 percent), and New Hampshire (+8.4 percent).
  
  
• The five states with the greatest year-over-year decrease in the RHPI are: Florida (-4.5 percent), Hawaii (-4.2 percent), Mississippi (-3.5 percent), Texas (-2.5 percent), and Colorado (-2.3 percent).

January 2025 Real House Price Local Market Highlights¹

• 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. (+15.8 percent), Pittsburgh (+12.4 percent), Milwaukee (+10.8 percent), Cincinnati (+9.6 percent), and Buffalo, N.Y. (+9.0 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. (-12.6 percent), San Diego (-5.8 percent), Atlanta (-5.2 percent), Orlando, Fla. (-4.5 percent), and Raleigh, N.C. (-3.1 percent).

Next Release

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of April 14, 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.

 ^{1 Missing five markets in this month’s report due to data disruptions.}