‘Powerful Market Forces’ Reducing Affordability

Supply squeezes and rising mortgage rates are powerful forces working against housing affordability, but homeowners continue to gain equity and the economy remains strong, said First American Financial Corp., Santa Ana Calif.

The company’s Real House Price Index said house prices increased by 2.9 percent between January and February, and by 5.1 percent year over year. The report said real house prices are 33.7 percent below their housing boom peak in July 2006 and 10.9 percent below the level of prices in January 2000. Unadjusted house prices increased by 5.9 percent in February on a year-over-year basis and are 8.0 percent above the housing boom peak in 2007.

The report said consumer house-buying power–how much one can buy based on changes in income and interest rates–declined by 2.6 percent between January and February but increased by 0.8 percent year over year.

“The consensus among economists is that the 30-year, fixed-rate mortgage will approach 5 percent by the end of this year,” said First American Chief Economist Mark Fleming. “All else held equal, this will make housing more expensive. However, some perspective is important. The historical average for the 30-year, fixed-rate mortgage is about 8 percent so, even with the expected increase, mortgage rates will still be low by historical standards.”

Fleming said the primary reason mortgage rates are rising is a healthy and growing economy. “Income levels are growing in many markets, which helps offset rising interest rates,” he said. “Nationally, house-buying power, how much one can buy based on changes in income and interest rates, has increased by 0.8 percent in the past year.”

The report noted some markets have seen faster income growth and subsequently greater increases in house-buying power, such as Riverside, Calif. (4.5 percent), San Francisco (3.5 percent), and Providence, R.I. (2.8 percent).

Fleming said the Supply Squeeze is “on.”

“Two dynamics are restricting housing supply this spring, namely an increasing number of homeowners are rate-locked, and the prisoner’s dilemma facing homeowners,” Fleming said. “The supply squeeze is already impacting the market. Existing-home sales, which account for roughly 90 percent of U.S. home sales, declined 1.3 percent in February compared with a year ago. The market is underperforming its potential by an estimated 300,000 seasonally adjusted annualized rate of sales. The risk of selling one’s home in a market with a shortage of inventory keeps existing homeowners from selling, preventing more supply from entering the market. This increases competition for homes and puts pressure on prices. Not surprisingly, unadjusted house prices increased 5.9 percent in February compared with a year ago.”

However, Fleming suggested some “relief” is on the horizon. “The supply squeeze and rising mortgage rates are powerful forces working against housing affordability, but homeowners are gaining equity and the economy remains strong,” he said. “Millennial demand for homeownership is growing and builders remain confident, demonstrated by the number of homes under construction reaching its highest point in more than a decade in February.The conditions driving the supply squeeze, upward pressure on prices and consequently lower affordability are likely to continue through 2018. However, some relief may be on the horizon, as more homes are on the way and income gains are offsetting rising interest rates. That’s good for the housing market.”

The report said states with the greatest year-over-year increase in the index were Nevada (11.7 percent), New York (11.3 percent), Kentucky (10.5 percent), New Hampshire (10.5 percent) and Missouri (10.2 percent). States with the greatest year-over-year decrease were Washington, D.C. (-1.7 percent), Maryland (-1.1 percent), New Jersey (-0.9 percent), Vermont (0.0 percent) and Arkansas (0.0 percent).

Among metro areas tracked by First American, markets with the greatest year-over-year increase in prices were San Jose, Calif. (17.8 percent), Las Vegas (12.9 percent), Seattle (11.1 percent), Charlotte, N.C. (10.2 percent) and Nashville, Tenn. (10.1 percent). Only Pittsburgh (-3.4 percent) saw a decrease.