Housing affordability lowest in a decade

With no easy fix, economist suggests adjustable-rate mortgage and upping one's income

Housing affordability lowest in a decade

The rapid decline in home affordability took another hit this week, falling to the lowest level in more than a decade. By one measure, affordability has eroded faster than any other point in one key measure – the Real House Price Index issued by First American.

Mark Fleming, the chief economist at First American, broke down the statistics leading to the fast decline, including the US cities where affordability declined the most and the least.

“In April 2022, the RHPI jumped up by 45.6% compared with a year ago, accelerating faster than any other point in the 30-year history of the series,” Fleming said. “This rapid annual decline in affordability was driven by two factors: a 21.2% annual increase in nominal house prices and a 1.9 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago.”

Yet amid the grim stats, a glimmer of hope in the form of an envisioned rebalancing.

“Housing affordability is rapidly declining, and our preliminary nominal house price index estimates for May and June indicate that house price growth is already moderating as potential buyers are pulling back from the market,” Fleming said. “The pandemic-driven supply and demand imbalance that fueled historically strong house price appreciation is coming to an end as the housing market rebalances to a new normal. Yet, the rebalancing will differ from city to city based on localized shifts in supply and demand and income levels.”

Read more: Adjustable-rate mortgages – the answer to housing market volatility?

Still, available options for homebuyers are increasingly scarce for the foreseeable future. The only way forward for many would-be homebuyers is an increase in income, the economist noted.

“For home buyers, there are few options to mitigate the loss of affordability caused by the increase in mortgage rates and home prices,” Fleming noted. “One way to offset the decline in affordability is with an equivalent, if not greater, increase in household income. Household income increased 5.0% since April 2021 and boosted consumer house-buying power, but even the strong year-over-year income growth was not enough to offset the affordability loss from higher rates and fast-rising nominal prices”

Short of that is the option of an adjustable-rate mortgage, Fleming suggested.

“Alternatively, another option for home buyers to mitigate the loss of affordability is to switch to an adjustable-rate mortgage with a lower rate than the fixed-rate benchmark,” he said. “In fact, the share of adjustable-rate mortgages relative to fixed-rate mortgages has grown as mortgage rates have increased in recent months.”

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Fleming stressed each market is different, and an exploration into market conditions in various cities may provide a pathway to homeownership.

“In April, affordability on both a year-over-year and month-over-month basis declined at its fastest pace in the series’ history,” he said. “However, real estate is local and house-buying power and nominal house prices vary by city, so it’s helpful to know where affordability is declining the most and the least.”

Still, exploring other cities in which to buy properties yields no panacea: “Affordability declined year over year in all of the 50 markets we track in April,” Fleming noted. “Mortgage rates increased 1.9 percentage points relative to one year ago, which reduces affordability, all else held equal. Higher mortgage rates decrease affordability equally in each market as mortgage rates are generally similar across the country. However, household income growth and nominal house prices vary by market, creating the geographic variance in affordability. Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from higher household income.”

Nevertheless, the economist produced a list of the top five markets at both extremes of affordability. The top five cities where affordability declined the most year-over-year, in descending order, are:

  • Charlotte, N.C. (+62.5%)
  • Tampa, Fla. (+59.6%)
  • Raleigh, N.C. (+59.6%)
  • Orlando, Fla. (+56.2%)
  • Phoenix (+56.1%)

Conversely, the top five cities where affordability declined the least are:

  • Virginia Beach, Va. (+28.5%)
  • Detroit (+29.9)
  • Portland, Ore. (+30.7%)
  • Boston (+31.4%)
  • Louisville, Ky. (+32.5%)

Fleming also provided some states’ highlights from April:

  • The five states with the greatest year-over-year increase in the RHPI were: Florida (+64.1), South Carolina (+60.5%), Arizona (+54.1%), Georgia (+52.8), and Connecticut (+51.5%).
  • There were no states with a year-over-year decrease in the RHPI.
     

Some local market highlights:

  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI were: Charlotte, N.C. (+62.5), Tampa, Fla. (+59.6%), Raleigh, N.C. (+59.6%), Orlando (+56.2%), and Phoenix (+56.1%).
  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

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