Many factors determine the affordability of housing on both a local and national level. Looking at the big picture, increased average income and decreased mortgage rates should equal more affordable housing across the country. However, this isn’t the case according to First American Economic Center [1] (FAEC).
Individual consumers have more house-buying power when 30-year mortgage rates are down and their income is up, but the problem is inventory. Higher demand for homes in a supply-constrained market stokes the fire for rapid appreciation.
In fact, September 2020 showed the quickest appreciation since 2013, and home affordability actually declined in 41 of 50 markets tracked by FAEC. The five cities with the highest month-over-month decline in affordability are:
- Kansas City, MO with -2.3%
- Las Vegas, NV with -1.9%
- Philadelphia, PA with -1.7%
- Pittsburgh, PA with -1.6%
- and Portland, OR with -1.6%
Breaking these numbers down, it’s important to note that Kansas City also saw a 1.7% decline in monthly household income, by far the largest of the top five cities. Las Vegas and Philadelphia actually had faster house price appreciation, but household income didn’t decrease as much month-to-month.
And Pittsburgh and Portland both saw affordability decrease at the same rate, but for different reasons. Pittsburg buyers had the highest house-buying power due to low mortgage rates and relatively steady income, however, appreciation was the highest of the five cities causing affordability to drop. In Portland, falling household income dropped enough to take affordability down with it.
This is a lesson in statistics. Even though the national data shows affordability is increasing, individual market data paints a different picture. So, what does that mean for 2021?
Looking at the year-over-year numbers instead of the monthly numbers, affordability decreased in only 13 of the top 50 markets, as opposed to 41. And, as of right now, houses are 5% more affordable than they were a year ago. But demand in historically supply-constrained markets is on the rise, meaning appreciation will follow suit. Expect another drop in affordability even with lower mortgage rates, especially if the average household income doesn’t trend upwards.
The next few months will be interesting to watch.