The gap between home prices and the wherewithal to buy a house with financing became larger than it’s been in 13 years.

“Real” Home Prices Up +19.6% y/y & Income Up +3.6% y/y

According to the First American Real House Price Index (RHPI) October report, the disparity between home prices and the ability to afford a home with financing widened more than it has been since October 2008.

Based on measuring relative housing values per wages and mortgage rates, the RHPI found that “real” home prices increased +19.6% y/y compared to the +3.6% y/y increase in incomes nationwide.  The month-to-month increase in real home prices was +3.7%.

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The average mortgage rate was 3.1% in October, up from 2.9% in September and 2.8% one year earlier.  One year ago in October 2020, the RHPI was +1.7% y/y.

According to Mark Fleming, chief economist with First American, “Affordability sank to its lowest level since October 2008.”

Consequences of Worsening Affordability

There are several pro/con consequences of worsening affordability:

  1. Buyers “on the margins” will become increasingly sidelined from the for-sale market.
  2. Buyers may see incrementally fewer bidding wars.
  3. Buyers may see some home price reductions.

Fleming said, “The challenge for homebuyers in 2022 will mirror 2020 and 2021 – you can’t buy what’s not for sale even if you can afford to.”

Affordability Constraints Tighter in Some Markets Than Others

In some cities and states, the RHPI jumped more than +30% y/y in October.  In Phoenix, for example, the RHPI rose +33.7% and in Arizona overall, the index increased +32.7%. First America indicated that a combination of strong investor activity, in-migration and limited inventory spurred the extraordinary RHPI jump of +33.7% y/y in Phoenix.  First American indicated that a combination of strong investor activity, in-migraion and limited inventory spurred this extraordinary RHPI in Phoenix.

In Charlotte, the RHPI in October jumped +32.3% while the index increased +25.9% in North Carolina.  Tampa saw an RHPI spurt of +30.9% in October.  The overall state of Florida saw an index jump of +25.9%.

A slight decline in average income pressured affordability in Charlotte and, despite Tampa’s slight home price gains being higher than Charlotte, wage growth (or lack of it) in Tampa rendered its RHPI 12-month growth a slightly lower level than Charlotte’s.

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Bottom Line

Fleming said, “Ultimately, nominal home price appreciation overwhelmed any affordability lift from house-buying power in all three of these markets.”

Thanks to National Mortgage News.



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