The February First American Real House Price Index (RHPI) jumped by nearly 31 percent, the fastest growth in the history of the index.
“This rapid annual decline in affordability was driven by two factors – a 21.7 percent annual increase in nominal house prices and a nearly full percentage point increase in the 30-year, fixed mortgage rate compared with one year ago,” First American Chief Economist Mark Fleming said in a release. “Rising mortgage rates impact both housing supply and demand, limiting supply by reducing the propensity of homeowners to sell and flattening demand by reducing consumer house-buying power.
The only way homebuyers could mitigate that loss of affordability was with an income increase, he said.
“Even though household income has increased 5.1 percent since February 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rapidly rising nominal prices,” Fleming said.
Things are not expected to change soon, he added.
“Rising mortgage rates and surging nominal house prices are expected to continue outpacing household income, so affordability will likely wane further nationally in the near term,” Fleming said. “One forecast, based on an estimate of when the 10-year Treasury yield will peak, suggests that the 30-year, fixed mortgage rate will likely peak between 5.0 and 5.7 percent, but may move as high as the low 6 percent range.”
The RHPI can model changes in income and interest rates and how they affect house-buying power and affordability, he said.
“In the latest RHPI report reflecting February 2022 data, the 30-year, fixed mortgage rate stood at 3.8 percent. Since then, rates have increased sharply, breaking the 5-percent barrier in mid-April. The increase in rates since February reduced house-buying power by $60,000,” Fleming said. “If the average mortgage rate reached 5.5 percent, assuming a 5 percent down payment and average household income of approximately $70,800, house-buying power falls by an additional $21,000. If rates increased even higher to 6 percent, house-buying power would fall by $40,000 compared with 5 percent.”
The five states with the greatest year-over-year increase in the RHPI in February were Florida (+43.1), South Carolina (+42.8 percent), Arizona (+39.0 percent), Georgia (+38.8), and Connecticut (+35.8 percent). No states had a year-over-year decrease.
The five markets with the greatest year-over-year increase in the RHPI in February were Charlotte, N.C. (+46.1), Raleigh, N.C. (+42.4 percent), Phoenix (+41.3 percent), Tampa, Fla. (+39.6 percent), and Jacksonville, Fla. (+39.1 percent). No markets had a year-over-year decrease.
“Rising mortgage rates impact affordability, but historical context is important. An average 30-year, fixed mortgage rate of 5.5 percent is still well below the historical average of nearly 8 percent. Even with mortgage rates at 5.5 percent, house-buying power is over $360,000, which is still strong and at the same level as 2018,” Fleming said. “Recency bias may have many thinking that rates below 3 percent and house-buying power above $450,000 is normal, but it is anything but normal from a historical perspective. The last two years were the exception, not the rule, and the housing market is adjusting to a not-so-new normal.”