Unlike the two-thirds of Americans who already own a home, potential first-time homebuyers in 2021 did not benefit from the surging levels of home equity driven by rapid house price appreciation, according to First American Economist Ksenia Potapov.
“Just as in 2020, low mortgage rates increased house-buying power and simultaneously boosted demand amid record low levels of homes for sale, further accelerating house price appreciation and reducing affordability,” she said. “Rising house-buying power improves affordability, but when nominal house prices outpace house-buying power, as they did in 2021, affordability falls.”
In the third quarter of 2021, renter house-buying power rose 14 percent year-over-year, from $290,000 to $331,000. That was driven in a large part by falling mortgage rates, Potapov said.
“Yet, despite the increase in house-buying power, annual house price appreciation hit record levels in 2021 and eroded affordability. The result? The share of homes for sale that a median renter could afford shrank on a year-over-year basis,” she said. “Nationally, the median renter could afford 53 percent of the homes for sale in the third quarter of 2021, down from 58 percent in the third quarter of 2020.”
First-time homebuyer affordability varies from market to market, Potapov pointed out. In the third quarter of 2021, Buffalo, N.Y., had the greatest share of affordable homes available. The median renter could afford 85 percent of all homes for sale.
The least affordable market was Los Angeles, where the median renter could afford only 5 percent of the homes for sale. Even though the median renter’s house-buying power in Los Angeles is $406,000, the median sale price averaged $828,000, Potapov said.
Markets with large shares of affordable homes for sale tended to have lower median house prices, but the trend was not universal, she added.
“Home prices alone do not accurately indicate affordability; it’s all about the share of homes for sale that are within the renter’s house-buying power,” she said.
Looking to 2022, mortgage rates, housing supply, and house price appreciation trends will influence first-time homebuyer affordability.
“Mortgage rates are expected to increase by the end of the year, which will dampen house-buying power, all else held equal,” Potapov said. “Housing supply is likely to remain tight, which will continue to drive house price appreciation, though likely at a more moderate pace than the frenzy last year. In other words, the housing market in the year ahead may look very similar to 2021.”