Key Points:

• Affordability fell by 2.6 percent on a month-over-month basis, snapping a four-month streak of improving affordability.  
  
  
• House-buying power declined by more than $14,000 due to the increase in mortgage rates since October. 
  
  
• If the average mortgage rate decreases to the year-end consensus industry forecast of 6.2 percent and annual house price growth remains stable, affordability will improve by 6 percent compared to one year ago.

After four consecutive months of improvements, October’s surprise increase in mortgage rates contributed to a 2.6 percent decline in affordability. Yet, affordability remains 11 percent higher compared to one year ago. Two factors contributed to the 11 percent annual increase in affordability – a 3.4 percent annual increase in nominal household income and a 1.2 percentage point decrease in the average 30-year, fixed mortgage rate compared with one year ago. Nominal house price appreciation stabilized at 3.8 percent in October, but still reached another record high. The increase in nominal house prices was not enough to offset the improved affordability from lower mortgage rates and higher household income. 

Despite the annual improvement, affordability nationally as measured by the RHPI remains 39 percent below the pre-pandemic historical average. The outlook for affordability in 2025 will be heavily dependent on the trajectory of mortgage rates. 

“If mortgage rates fall to 6.2 percent by end of the year as projected, the median-priced home would be affordable for just over a million renter households. Small movements in mortgage rates can make a big difference for many potential home buyers.” 

Return of Higher-for-Longer Mortgage Rates?

Bond yields, which often move in anticipation of the Federal Reserve’s decisions on rates, surged in October and into November as investors recalibrated their expectations on the future path of interest rates based on mostly positive economic data and the recent election results. 

We can use the RHPI to model shifts in income and interest rates and see how they either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases, and vice versa. In the latest RHPI report reflecting October 2024 data, the average 30-year, fixed mortgage rate was 6.4 percent. Just one month prior, the rate was 6.18 percent. Holding income constant at its October level and assuming a 5 percent down payment, the increase in mortgage rates alone reduced house-buying power by over $10,000. Since October, the mortgage rate has increased further to 6.8 percent in mid-November, reducing house-buying power by approximately $15,000. 

An average of several industry forecasts projects that mortgage rates will end the year lower, at 6.2 percent. If mortgage rates fall to 6.2 percent in December and house price growth remains stable at approximately 3.8 percent, we expect affordability to improve by nearly 6 percent relative to one year ago.  

The Outlook for Mortgage Rates is Uncertain

Federal Reserve Chair Jerome Powell recently indicated the central bank is not in a rush to lower rates, leaving investors split on the likelihood of another 25-basis point cut in December, and calling into question the pace and extent of rate cuts in 2025. More importantly, recent history suggests that the yield on the 10-year Treasury bond is less sensitive to changes in the fed funds rate and more responsive to the longer-term outlook. That means mortgage rates won't decline significantly through the end of the year and into 2025 unless the Fed throws a curveball, such as cutting rates even more than expected, which would likely signal recession risk has risen significantly. 

Nonetheless, even modest declines in the mortgage rate could bring some buyers off the sidelines. According to our analysis of 2024 ASEC data, a decline in mortgage rates from the mid-November level of 6.8 percent to the projected rate of 6.2 percent would increase the share of renter households that can afford the median-priced home by nearly 3 percentage points, or just over a million renter households. Small movements in mortgage rates can make a big difference for many potential home buyers. 

Sources:

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

October 2024 Real House Price Index Highlights

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

• Real house prices increased 2.6 percent between September 2024 and October 2024. 
  
  
• Real house prices decreased 11.0 percent between October 2023 and October 2024.
  
  
• Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 2.1 percent between September 2024 and October 2024, and increased 16.6 percent year over year.
  
  
• Median household income has increased 3.4 percent since October 2023 and 58.0 percent since January 2014.
  
  
• Real house prices are 30.9 percent more expensive than in January 2000.
  
  
• Unadjusted house prices are now 62.0 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 8.5 percent below their 2006 housing boom peak. 

October 2024 Real House Price State Highlights

• There were no states with a year-over-year increase in the RHPI.
  
  
• The five states with the greatest year-over-year decrease in the RHPI are: Oregon (-16.4 percent), Colorado (-16.1 percent), South Dakota (-15.1 percent), Florida (-15.1 percent), and Arizona (-14.8 percent).

October 2024 Real House Price Local Market Highlights

• There were no Core Based Statistical Areas (CBSAs) with a year-over-year increase in the RHPI.
  
  
• 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. (-20.2 percent), Raleigh, N.C. (-17.6 percent), San Diego (-16.8 percent), Orlando, Fla. (-15.8 percent), and Portland, Ore. (-15.7 percent).

Next Release

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of December 23, 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.