Affordability declined month over month in September for the second month in a row, even as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of increased affordability. The 30-year, fixed-rate mortgage fell by 0.05 percentage points and household income increased 0.2 percent compared with August 2020. Rising household income and declining mortgage rates each boost consumer house-buying power.
“Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from lower mortgage rates, especially if household income growth doesn’t keep up.”
However, rising house-buying power drives greater demand, and surging demand in a supply-constrained market fuels faster nominal house price appreciation. This is exactly what occurred in September, as nominal house prices, the third component of the RHPI, appreciated at its fastest monthly pace since 2013. The rapid house price appreciation was enough to overcome the benefit of increased house-buying power. But, real estate is local and house-buying power and nominal house price gains vary by city, so the national perspective may not tell us much about what’s happening to affordability where you live.
The Five Cities Where Affordability Declined the Most
Declining mortgage rates increase affordability equally in each market as mortgage rates are generally the same across the country. However, household income levels and nominal house prices vary by market, so the affordability dynamic varies as well. Of the 50 markets we track, affordability declined in 41 of them month over month. The five markets with the highest month-over-month decline in affordability were:
- Kansas City, Mo. (-2.3 percent)
- Las Vegas (-1.9 percent)
- Philadelphia (-1.7 percent)
- Pittsburgh (-1.6 percent)
- Portland, Ore. (-1.6 percent)
Affordability Story Differs Based on Local Dynamics
In September, Kansas City, Mo. had the greatest month-over-month decrease in affordability, mostly due to of the 1.7 percent monthly decline in household income, the largest household income decline relative to the other four markets. Las Vegas and Philadelphia both had faster nominal house price appreciation than Kansas City, but their household incomes did not decline by nearly as much.
Finally, the remaining cities on the list, Pittsburgh and Portland, demonstrate the intricate dance between house-buying power and nominal house price appreciation. Pittsburgh and Portland both experienced a 1.6 percent decline in affordability in September, but for different reasons. Pittsburgh’s decline in household income was marginal and not enough to offset the affordability boost from lower mortgage rates, so house-buying power improved in the steel city. Yet, Pittsburgh’s nominal house price appreciation was the fastest of the five cities, outpacing house-buying power, so affordability waned. While Portland’s nominal house price appreciation was slower than Pittsburgh, house-buying power declined significantly more due to falling household income, resulting in the same decline in affordability as Pittsburgh.
What Will Drive Housing Affordability in 2021?
The good news is that on a year-over-year basis affordability declined in only 13 of the top 50 markets, and housing remains 5 percent more affordable nationally than a year ago. However, the list of markets with declining affordability on an annual and monthly basis has swelled in recent months. The growing number of markets where affordability is declining demonstrates the dynamic we expected to see – the strong growth in house-buying power in 2020 has boosted demand in a historically supply-constrained market, putting tremendous upward pressure on nominal house price appreciation.
Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from lower mortgage rates, especially if household income growth doesn’t keep up. With mortgage rates expected to remain low in 2021 and supply expected to remain constrained, affordability trends will be closely tied to shifts in household income in the months ahead.
For more analysis of affordability, please visit the Real House Price Index.
The RHPI is updated monthly with new data. Look for the next edition of the RHPI the week of December 28, 2020.
September 2020 Real House Price Index Highlights
The First American Real House Price Index (RHPI) showed that in September 2020:
- Real house prices increased 0.78 percent between August 2020 and September 2020.
- Real house prices declined 5.0 percent between September 2019 and September 2020.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.79 percent between August 2020 and September 2020, and increased 15.9 percent year over year.
- Median household income has increased 5.9 percent since September 2019 and 71.8 percent since January 2000.
- Real house prices are 26.3 percent less expensive than in January 2000.
- While unadjusted house prices are now 16.8 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 48.2 percent below their 2006 housing boom peak.
September 2020 Real House Price State Highlights
- The five states with the greatest year-over-year increase in the RHPI are: Wyoming (+3.2 percent), Oklahoma (+1.6 percent), Ohio (+1.0 percent), Tennessee (+0.9 percent), and Arizona (+0.5 percent).
- The five states with the greatest year-over-year decrease in the RHPI are: California (-8.2 percent), New Hampshire (-7.6 percent), Massachusetts (-7.4 percent), Hawaii (-7.3 percent), and Maryland (-6.7 percent).
September 2020 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: Pittsburgh (+6.7 percent), Cleveland (+4.6 percent), Kansas City, Mo. (+3.7 percent), Houston (+3.1 percent), and New Orleans (+2.8 percent).
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year decrease in the RHPI are: San Francisco (-15.0 percent), San Jose, Calif. (-12.9 percent), Boston (-10.4 percent), San Diego (-9.2 percent), and Miami (-8.8 percent).
The next release of the First American Real House Price Index will take place the week of December 28, 2020.
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. © 2020 by First American. Information from this page may be used with proper attribution.