YoY Housing Affordability Declines—a First Since January 2019

Housing affordability on an annual basis declined in March for the first time since January 2019, signaling the end of a more than two-year streak of rising affordability, according to the latest affordability report from First American Financial Corporation and its Chief Economist Mark Fleming.

“The long run of increasing affordability snapped, even as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of greater affordability relative to one year ago," Fleming said. “Lower mortgage rates and higher household income compared with one year ago propelled an 11% increase in house-buying power. However, surging house-buying power drives demand, and rising demand in a supply-constrained market accelerates nominal house price appreciation,” said Fleming. “In March, the final component of the RHPI, nominal house prices, appreciated at its fastest annual pace since 2005, 14.8%, wiping out any affordability boost from rising house-buying power. Yet, real estate is local and since house-buying power and nominal house price gains vary by city, local affordability trends may differ greatly city by city as well.”

Affordability decreased most in Kansas City, in March. Fleming attributes that to the city's 4.3% annual decline in household income and 16.5% increase in nominal home prices compared to one year ago.

"Phoenix and Tampa both had even faster nominal house price appreciation than Kansas City, but household incomes held steady in both markets, so the relative affordability loss was less than in Kansas City,” Fleming said.

Affordability also decreased in Seattle and Austin due to a combination of fast nominal house price growth and lowering household incomes.

"In all of these markets, the takeaway is that nominal house price appreciation accelerated to a level that eliminated any affordability gains from strong house-buying power,” Fleming said.

So, where will all of this lead in terms of house affordability?

Fleming says that as house prices continue to climb, some prospective homebuyers could pull back. Decreased competition could then cause appreciation to moderate, which may help affordability.

In addition, he says, "as more and more people are vaccinated and the economic recovery continues, demand for labor is likely to increase, and that can put upward pressure on wages as employers compete to attract employees.

"At the same time, mortgage rates edged down slightly in April and even dipped below 3% in May. House-buying power is likely to remain robust in the months to come, but affordability trends will likely hinge on changes in nominal house price appreciation.”

Below are a few key takeaways from First American's RHPI for March, which can be read in full at firstam.com.

• Real house prices increased 4.2% between February 2021 and March 2021.
• Real house prices increased 3.5% between March 2020 and March 2021.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 2.5% between February 2021 and March 2021, and increased 10.9% year over year.
• Median household income has increased 5.9% since March 2020 and 77.8% since January 2000.
• Real house prices are 21.6 % less expensive than in January 2000.
• While unadjusted house prices are now 25.3% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 44.9% below their 2006 housing boom peak.