First American: Low inventory drives drop in house price affordability

Tight inventory is continuing to drive home prices skyward

First American: Low inventory drives drop in house price affordability
The inventory shortage has made homes more unaffordable in June, according to First American’s real house price index.

The month saw real house prices increase 9.3% from last year as the inventory of existing homes for sale dropped to a supply of 4.3 months.

On a month-over-month basis, however, June home prices were more affordable. With lower interest rates compared to those in May as well as a 0.6% increase in wages helping offset gains in nominal house prices, June posted a 1.3% month-over-month increase in affordability.

"On a month-over-month basis, affordability improved slightly thanks to the seventh straight month of falling rates for 30-year, fixed-rate mortgages and modest wage gains,” said Mark Fleming, chief economist at First American. “The increase in consumer purchasing power offset the gains in unadjusted house prices. However, on a year-over-year basis, with rates still higher than a year ago, affordability declined 9.3%.”

The annual decline in affordability comes not only as a result of the dwindling inventory but also due to a continuous slide in new-home construction. First American said that new household formations have grown by 5.9 million since 2009. However, the net new number of housing units has grown by just 3.5 million. This means that the US has a housing shortage of 2.4 million units.

"The underlying fundamental issue is an overwhelming lack of supply,” said Fleming. “With current homeowners facing a prisoner's dilemma and unwilling to list their homes for sale, little relief is expected in the supply of existing homes. The supply of newly constructed homes is also sagging, adding to the supply challenges.”

The index further showed that with one of the smallest inventories of homes for sale, Seattle saw the biggest decrease in affordability, dropping 16.1% on a yearly basis.

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