Home Prices Still More Affordable Despite Increasing 27%!
Many home shoppers are shocked by increased home prices, but the prices may be slightly lower as a percentage compared to the 2006 peak. Mark Fleming, the chief economist at First American, stated that the January 2022 First American Real House Price Index (RHPI) increased by almost 27%, and this is the fastest growth since 2004.
Compared to one year ago, there was a 21.7% increase in nominal house prices. There was also a 0.7 percentage points increase in the 30-year fixed mortgage rate as reported by Mortgageorb.com.
Although household income has increased by 5% since January 2021, it was not enough to offset the adverse effects of higher rates or nominal prices.
The RHPI measures price changes in single-family homes across the U.S., adjusted for income and interest rate changes over time. It also accounts for changes in consumer house-buying power at the national, state, and metropolitan levels. The RHPI adjusts to house-buying power and serves as a measure of housing affordability.
Fleming says that affordability will continue to decline due to rising mortgage rates due to increasing house prices. Recently household income gains continue to outpace increases in housing costs. It’s essential to consider the past to understand true house affordability.
Fleming continues, “Nationally, real, house-buying power-adjusted house prices remain 29 percent below the peak in April 2006,” continues Fleming. “While consumer house-buying power declined in January 2022, it remains near record levels and more than double the level of consumer house-buying power in April 2006 thanks to higher household income and significantly lower mortgage rates. Household incomes today are nearly 48 percent greater than April 2006 and the average mortgage rate is over 3 percentage points below its April 2006 level. In fact, real house prices nationally are at the same level they were in 2000.”
The RHPI reports that all 50 markets are now more affordable than during the peak housing boom.
“For nominal house prices, all 50 markets we track in the RHPI have surpassed their previous housing price peaks. Yet, nominal house prices don’t tell the whole affordability story. While nominal house prices have increased, house-buying power has also increased because of a long-run decline in mortgage rates and the slow, but steady growth of household income,” said Fleming. “Mortgage rates are generally the same across the country, so the long-run decline in mortgage rates boosts affordability equally in each market. Household income growth and nominal house prices, on the other hand, differ from market to market, so affordability varies geographically as well.
“According to our house-buying power-adjusted RHPI, homes are 34 percent more affordable on average across all 50 markets than their respective RHPI peaks,” reported Fleming. “While the supply-demand imbalance in today’s housing market continues to fuel strong house price appreciation across the country, the dramatic increase in house-buying power relative to 2006 driven by lower mortgage rates and higher incomes has more than made up for it. In fact, in four cities homes are more than 50 percent more affordable today than at their prior RHPI peak.”
Washington, D.C. (53%), Baltimore (53%), Chicago (52%), Miami (50%), and Riverside, Calif. (48%) are the top five places where affordability has improved most since their previous peak. Nashville, Tenn. (0.3%), Buffalo, N.Y. (3%), and Denver (9%) are the top five places where affordability has declined since its previous peak. Kansas City, Mo. Salt Lake City (15%) and (12%)
Flemming says, “Homes are less affordable than they were a year ago, but nationally, and in most markets, they remain much more affordable than at the peak of the previous housing boom in 2006. House prices are widely expected to continue to increase, although at a slower pace, and mortgage rates are likely to rise, so it’s likely that affordability will decline further, but in most markets we’re still a long way from the mid-2000s boom.”
Real house prices rose 6.3% between January 2021-and 2022 and 26.8% between Jan 2021-and 2022. Real house prices are 0.5% higher than in January 2000. Median household income has increased by 5% since Jan 2021 and 69.9% from January 2000.
Summary
Unadjusted house values are 46.6% higher than the peak housing boom in 2006. However, real house-buying power-adjusted prices are still 29.5% lower than their peak housing boom peak in 2006.
Arizona (+38.3%), Florida +37.4%, South Carolina (+35.6%), Georgia (34.2%), and Connecticut (+33.5%) had the highest year-over-year increases in RHPI. The RHPI did not decrease year over year in any state.
First American tracks five Core Based Statistical Areas (CBSAs) with the highest year-over-year RHPI increases: Charlotte, N.C. (+40.9%), Phoenix, N.C. +40.4%; Raleigh, N.C. (36.9%); Atlanta, (+36.7%); Jacksonville, Fla. (36.5%). There was no market with a decrease in RHPI year-over-year.
Sean A. Stephens, Esq., CMB®
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