Since the pandemic, the housing market has been tumultuous, to put it lightly. Inflation turned out to be the constant pressure on the market in 2022 and the nominal interest rate was raised by nearly 4%, plummeting already low affordability numbers.
According to a First American Economic Insights Blog report, while 2022 started with double-digit games, by October those numbers were long gone as the market declined by 68% year-over-year according to the Real House Price Index (RHPI).
At the levels of affordability we are experiencing, some rebalancing of the market has occurred and. should be considered natural.
“Housing affordability is the result of the tug-of-war between purchasing power, which is the product of household income and mortgage rates, and nominal house price growth,” said First American Economist Ksenia Potapov. “House price appreciation reduces affordability, while falling mortgage rates and rising incomes increase affordability.”
“Changes in income play a smaller part in short-term affordability fluctuations, so they’re excluded from this analysis. In the early days of the pandemic, fast-falling mortgage rates were winning the tug-of-war, despite double-digit annual house price appreciation, and, as a result, affordability was improving,” Potapov continued. “But just as fast-falling mortgage rates improved affordability in 2020 and 2021, the fast-rising mortgage rates of 2022 were responsible for nearly 80% of the overall decline in affordability. It’s clear that fluctuations in mortgage rates have a much more acute impact on affordability than house price appreciation or depreciation.”
Looking ahead, mortgage rate forecasts for 2023 ranged from the low 5’s to the low 6’s, while annual house price growth forecasts range from modest increases to modest declines, generally between –5% and 5%
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