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Rise in Rates to Impact Consumer Affordability

First American Financial Corporation has released the August 2021 First American Real House Price Index (RHPI), a measure of 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—a measure of housing affordability.

The RHPI found that year-over-year nominal house price appreciation reached 20.7%, the third consecutive month it has set a record. Real house prices increased 1.2% between July 2021 and August 2021.

Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.5% between July 2021 and August 2021, and increased 3.5% year-over-year, according to the RHPI. Median household income also reported an increase of 2.3% since August 2020, and 65.2% percent since January 2000.

“According to our RHPI, which measures housing affordability in the context of changes in consumer house-buying power, incorporating changes in household income, mortgage rates and nominal house prices, affordability declined 16.6%,” said Mark Fleming, Chief Economist at First American. “The growth in nominal house prices vastly outpaced the 3.5% increase in house-buying power compared with a year ago, yet real, house-buying power-adjusted house prices remain 37.5% below their 2006 housing boom peak.”

First American’s RHPI analyzes income and interest rate trends and examines how they either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases.

“If the average mortgage rate increased from its August level of 2.84% to the expected end-of-year level of 3.2%, assuming a 5% down payment, and the August 2021 average household income of $68,658, house-buying power falls by approximately $21,500,” explained Fleming. “If rates increased to the anticipated end of 2022 level, 3.7%, house-buying power would fall by $49,000.”

Affordability remains an issue, as the U.S. Department of Housing & Urban Development (HUD) and the Census Bureau reported earlier this week that the median sales price of new homes sold in September 2021 was $408,800, with an average sales price nearly $50,000 more at $451,700.

Contributing to the spike in median prices are lingering inventory issues. Home builders are still faced with a shortage of supplies and building materials, as the price of framing lumber hit a record-high of more than $1,500 per thousand board feet in mid-May, according to Random Lengths. The previous record before prices began their ascent at the outset of the pandemic in April 2020 was just below $600 per thousand board feet.

“Housing demand remains strong and residential construction is projected to remain at its current pace through 2023,” said National Association of Home Builders (NAHB) Chairman of the Board John C. Fowke in a recent letter to the Biden Administration. “For these reasons, NAHB remains committed to doing its part to ensure housing remains a key component of American socio-economic opportunity, creating jobs and ensuring the U.S. economy continues to move forward. However, we cannot do this without your assistance on the continuing lumber and supply chain crises.”

The rise in rates as we close out 2021 may also factor into affordability for many, as just last week, Freddie Mac’s latest Primary Mortgage Market Survey (PMMS) for the week ending October 21, 2021, showed the 30-year fixed-rate mortgage (FRM) averaging 3.09% with an average 0.7 point, up from last week when it averaged 3.05%.

“Rising mortgage rates impact affordability, but one of the root causes of rising mortgage rates is an improving economy, and an improving economy often leads to higher wage growth. In fact, our estimate of average household income increased approximately 0.2% on a monthly basis in August 2021,” said Fleming. “If incomes continue to increase at a rate of 0.2% per month through the end of 2021, the higher income will reduce the projected end-of-year 2021 decrease in house-buying power from $22,000 to nearly $18,000. And if incomes continued to grow at 0.2% through the end of 2022, the projected end-of-year 2022 decrease in house-buying power would drop from $49,000 to $35,000.”

Fleming continued, “Rising household income limits the negative impact that higher rates will have on house-buying power. Rising rates will lower affordability, but rising household incomes can help to mitigate the impact. Ultimately, changes in affordability depend on the tug-of-war between rising household income and upward pressure on mortgage rates.”

Regionally, the five states that experienced the greatest year-over-year increase in the RHPI were:

  • Arizona: +27.8%
  • Nevada: +20.6%
  • Florida: +20.5%
  • Connecticut: +20.1%
  • Vermont: +19.8%

There were no states with a year-over-year decrease in the RHPI.

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:

  • Phoenix, Arizona: +29.7%
  • Jacksonville, Florida: +25.1%
  • Tampa, Florida: +24.9%
  • Charlotte, North Carolina: +24.1%
  • Las Vegas, Nevada: +21.4%

Among the CBSAs tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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