Housing affordability continues to fall, according to the recently released May 2021 First American Real House Price Index (RHPI.)
“Housing affordability declined on a year-over-year basis for the third month in a row in May, following a two-year streak of rising affordability,” First American Chief Economist Mark Fleming said in a release. “The decline in May occurred even as two of the three key drivers of the RHPI, household income and mortgage rates, swung in favor of greater affordability relative to one year ago.”
House-buying power rose 8 percent year-over year, according to the RHPI. That was fueled by lower mortgage rates and higher incomes, Fleming said.
“The affordability gains from house-buying power, however, were offset by the third component of the RHPI, nominal house price appreciation, which reached a record 18 percent in May, surpassing the previous peak from 2005,” Fleming said.
Affordability dropped in 49 of the 50 markets tracked by First American. The greatest year-over-year affordability declines were in Phoenix (-22.7 percent); Seattle (-20.1 percent); Kansas City, Mo. (-19.6 percent); Tampa, Fla. (-17.8 percent); and Las Vegas (-17.2 percent).
“Phoenix also experienced the biggest annual increase in nominal house prices of any major market – 29.3 percent,” Fleming said. “The steep increase in nominal house prices overshadowed any affordability gains from increased house-buying power. A similar dynamic played out in Tampa as year-over-year nominal house price appreciation of 25.6 percent outpaced house-buying power.
“In Seattle and Las Vegas, house-buying power ticked up as the positive impact of falling mortgage rates offset a decline in household incomes. However, like Phoenix and Tampa, nominal house price growth in Seattle (20.7 percent) and Las Vegas (19.9 percent) overshadowed the house-buying power gains. Kansas City was the only one of the five markets where house-buying power declined, combining with faster house price appreciation to drive a decline in affordability.”
Declining affordability could price out some potential homebuyers, leading to fewer bidding wars and moderating house price appreciation, Fleming said. An increasing housing inventory could also ease pressure on house price growth, he said.
“Affordability trends in the coming months will depend on the supply and demand dynamics behind nominal house price appreciation – dynamics which will play out differently in each market,” he said.