Housing affordability continued its decline in July, according to First American Chief Economist Mark Fleming. The July 2022 First American Real House Price Index reflected that decline, he said, jumping by nearly 54 percent year-over-year.
“For homebuyers, there are few options to mitigate the loss of affordability caused by a higher mortgage rate and rising prices,” Fleming said in a release. “One way to offset the decline in affordability is with an equivalent, if not greater, increase in household income. Another option is choosing an adjustable-rate mortgage, which typically has a lower rate than a 30-year, fixed-rate mortgage.”
Although those options helped increase house-buying power, they were not enough to offset affordability loss from higher rates and fast-rising nominal prices in July.
“As affordability wanes, would-be buyers are pulling back from the market, prompting annual house price appreciation to moderate. Annual house price growth peaked in March at nearly 21 percent but has since decelerated to a still-high 16.7 percent in July,” Fleming said. “As the housing slowdown continues, the pace of house-price moderation will vary market to market, with prices decelerating faster in some markets than in others. By analyzing which markets are considered overvalued, we can identify the markets at risk of more rapid price deceleration.”
He said as of July, most of the top 50 markets tracked by First American remained undervalued, some significantly undervalued. For example, the Detroit, Philadelphia and Pittsburgh markets were considered undervalued by nearly $200,000.
“However, real estate is local and not all markets are created equal,” Fleming said. “There were 15 markets considered overvalued in July, meaning the median existing-home sale price exceeded house-buying power. One year ago, only four markets were considered overvalued.”
San Jose, Calif., was the most overvalued market, with median consumer house-buying power in July at just over $770,000, barely more than half of the median sale price of a home at $1.46 million.
“Overvaluation was calculated based on July 2022 house prices and mortgage rates, but mortgage rates have drifted higher since then,” Fleming said. “If we hold household income and median sale prices constant at their July 2022 levels, the increase in the average 30-year, fixed mortgage rate from 5.4 percent in July to 6 percent in September increases the number of overvalued markets by four, adding San Antonio, Miami, Tampa, Fla., and Salt Lake City to the list and bringing to the total to 19.”
Where does the housing market go from here?
“Housing overvaluation is a function of three factors: house prices, household income and mortgage rates,” Fleming said. “First American Data & Analytics’ preliminary nominal house price index indicates that house price deceleration is likely to continue in September. Meanwhile, median household incomes are expected to continue to rise, as the supply and demand imbalance in the labor market persists, putting upward pressure on wages.
“While mortgage rates are expected to continue to drift higher over the coming months, much of the rapid increase in rates is likely behind us. While the markets considered overvalued may need to adjust to the not-so-new reality of higher mortgage rates, housing market fundamentals still support a moderation of annualized house price appreciation rather than a sharp decline.”