First American Financial Corp. released its June 2023 First American Real House Price Index (RHPI).
The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
Mark Fleming, chief economist at First American, said two of the three key drivers of the RHPI, nominal house prices and mortgage rates, dragged affordability lower in June.
“The 30-year, fixed mortgage rate increased by 0.3 percentage points and nominal house prices accelerated by 0.8 percent compared with May,” he said in a release. “While household income increased by 0.4 percent, it was not enough to offset the affordability-dampening impact from higher mortgage rates and prices.”
Consumer house-buying power declined by nearly $9,000 compared with May and remains $32,000 lower than one year ago, Fleming added.
“The outlook for house-buying power is heavily dependent on the path for mortgage rates, and that path is highly uncertain,” he said.
As of mid-August, the average mortgage rate nationally sat at approximately 7 percent. In June of last year, the average mortgage rate nationally was roughly 5.5 percent. Holding incomes constant at their June 2023 level and assuming a 5 percent down payment, the increase in mortgage rates alone reduced house-buying power by nearly $57,000, according to Fleming.
“An average of several industry forecasts projects that mortgage rates will end the year lower, at 6.1 percent,” he said. “If those forecasts are correct and the average mortgage rate decreases from the 7 percent level to 6.1 percent, house-buying power increases by nearly $32,000. However, if mortgage rates drifted upward to 7.5 percent, house-buying power would fall by $16,000.”
Fleming also said the popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond. Since the end of the Great Recession, the 30-year, fixed mortgage rate has on average remained 1.7 percentage points (170 basis points) higher than the 10-year Treasury bond yield.
“As the industry forecasts predict, it’s reasonable to assume that the spread and, therefore, mortgage rates will moderate later in the year if the Federal Reserve stops further monetary tightening and provides investors with more certainty,” he said. “However, it’s unlikely that mortgage rates will revert to the 5.5 percent levels of 2022 until inflation has moved closer to the Federal Reserve’s 2 percent target and it begins loosening monetary policy, or there’s a significant economic downturn. A likely scenario is that mortgage rates continue to hover in the 6.5 percent-to-7.5 percent range for the remainder of the year, which means affordability will remain a challenge for many homebuyers.”