Real house prices in November 2021 increased 1.5 percent month-over month and 21 percent year-over-year, according to the First American Real Price Index (RHPI).
“In November, year-over-year nominal house price appreciation reached 21.5 percent, the sixth consecutive month it has set a new record,” First American Chief Economist Mark Fleming said in a release. “According to our RHPI, affordability declined 21 percent compared with a year ago, as the growth in nominal house prices combined with the 30-basis point increase in the 30-year, fixed mortgage rate vastly outpaced the 4.4 percent increase in income. Affordability is likely to decline further in 2022, because both mortgage rates and nominal house prices are expected to rise.”
The Federal Reserve is expected to increase mortgage rates as early as March, Fleming said.
“The consensus among economists is that the 30-year, fixed mortgage rate will increase from its November rate of 3.1 percent to 3.7 percent by the end of 2022,” he said. “Some forecasters predict rates will reach 4 percent, which is still historically low, but well above what buyers have grown accustomed to in recent years.”
When mortgage rates increase, consumer house-buying power tends to decrease, Fleming said.
“If the average mortgage rate remained at its current level of approximately 3.5 percent through the spring homebuying season, assuming a 5 percent down payment and holding average household income constant at the November 2021 level of $69,800, house-buying power falls by approximately $25,000,” he said. “If rates increase to the anticipated end of 2022 level of 3.7 percent, house-buying power would fall by $36,000. Finally, if mortgage rates reach 4 percent, as some industry experts anticipate, house-buying power would fall by nearly $52,000 compared with November 2021.”
While rising mortgage rates affect housing affordability, they also reflect an improving economy, which can lead to stronger wage growth, Fleming said.
“Rising household income can blunt the negative impact that higher rates have on house-buying power,” he explained. “In fact, our estimate of average household income increased approximately 0.6 percent on a monthly basis in November 2021. If incomes continue to increase at this rate through the end of 2022, the income growth would reduce the projected end-of-year 2022 decrease in house-buying power to just $700, instead of $36,000.”
Even so, potential homebuyers may opt to enter the market now, before rates rise.
“The fear of missing out, or FOMO, on low rates and the potential loss of house-buying power may supercharge the housing market ahead of the spring homebuying season,” Fleming said. “However, housing supply tends to increase in the spring months as more sellers list their homes for sale. While homebuyers may have FOMO because of rising rates, they may not want to succumb to the fear of better options, or FOBO, because there may be a better home option or options when there’s more homes for sale, even if it means they may pay more.”