First American Financial Corporation‘s Real House Price Index reported that housing affordability declined in 45 of the 50 major markets, with overall affordability falling for the first time in more than two years.
“Housing affordability on a year-over-year basis declined in March for the first time since January 2019, ending a more than two-year streak of rising affordability,” said Mark Fleming, chief economist at First American. “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.”
“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,” added 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.”
Markets that saw the greatest year-over-year decline in affordability include Kansas City, MO; Phoenix, AZ; Tampa, FL; Seattle, WA and Austin, TX.
“Falling mortgage rates boost affordability equally in each market as mortgage rates are generally the same across the country. However, household income growth and nominal house prices vary by market, so the affordability dynamic varies as well,” said Fleming. “Faster nominal house price appreciation can erode, or even eliminate, any benefit in affordability from lower mortgage rates, especially if household income declines at the same time.”
Fleming added that if house prices continue to escalate, some prospective homebuyers will pull back, leading to a decline in bidding wars. However, he expects house-buying power to remain robust in the coming months.