Housing Affordability Showing Up in Unexpected Places

Housing affordability–this year’s buzzphrase–is popping up in some of the more unlikely U.S. housing markets, said First American Financial Corp., Santa Ana, Calif.

The company’s April Real House Price Index, which measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power as well as housing affordability, said real house prices decreased by 0.9 percent between March and April and by 0.72 percent between April and a year ago. .

The report said consumer house-buying power–how much one can buy based on changes in income and interest rates–increased by 1.5 percent between March and April, and by 6.7 percent year over year. Average household income has increased by 2.7 percent since April 2018 and 56.2 percent since January 2000. Real house prices are 15.0 percent less expensive than in January 2000.

First American Chief Economist Mark Fleming said two of the three key drivers of the Index–household income and mortgage rates–swung in favor of increased affordability in April, noting the 30-year, fixed-rate mortgage fell by 0.33 percentage points and household income increased 2.7 percent from a year ago. “When household income rises, consumer house-buying power increases,” he said. “Declining mortgage rates have a similar impact on affordability, so in April home buyers received a double shot of house-buying power to jolt affordability in their favor nationally.”

The third factor–nominal house price appreciation, which began to pick up the pace in April–dampened affordability,” Fleming said. “Despite the increasing rate of nominal house price appreciation, which makes homes less affordable, the consumer house-buying power gains were strong enough to win the affordability tug-of-war,” Fleming said. “Indeed, the RHPI, which adjusts nominal house prices based on changes in income and interest rates, decreased 0.72 percent compared with one year ago. The last time real house prices declined was in October 2016.”

That affordability showed up in unexpected places; of the 44 markets First American tracks, affordability improved in 43 of them month-over-month; year-over year, affordability improved in 18 markets. Markets with the highest year-over-year growth in affordability were cities that in recent years have led the nation in price growth and relative unaffordability: San Jose, Calif.; Seattle; Portland, Ore.; San Francisco; and Los Angeles.

The report said San Jose saw the greatest increase in affordability, as house-buying power jumped by 6.9 percent due to the decline in mortgage rates and a 2.9 percent increase in household income compared with a year ago. Nominal house prices in San Jose also declined by 2.3 percent year-over-year, which further contributed to the 8.6 percent decline in real house prices. In Seattle, house-buying power increased by 8.8 percent due to a 4.7 percent increase in household income, which was more than enough to counter the 2 percent increase in nominal house prices compared with a year ago.

“One reason why these markets have seen such strong gains in affordability is because household income growth was so strong,” Fleming said. “In the top four markets, household income growth exceeded house price growth. That’s an affordability boost even without the help of falling rates.

Fleming added the “intricate dance” between house-buying power and nominal house price appreciation determines the direction and pace of affordability trends. “Home buyers were grateful that faster nominal house price appreciation was not enough to overpower the increase in house-buying power,” he said. “Yet, more house-buying power brings more demand and possibly even faster house price appreciation. The dance continues.”

Other report findings:

–States with the greatest year-over-year increase in the Index: Wisconsin (+4.7 percent), Rhode Island (+4.3 percent), New Hampshire (+3.5 percent), Georgia (+2.8 percent) and Ohio (+2.4 percent).

–States with the greatest year-over-year decrease in the Index: North Dakota (-7.4 percent), Wyoming (-6.6 percent), Louisiana (-4.3 percent), Vermont (-3.9 percent) and Oklahoma (-3.6 percent).

Metro markets with the greatest year-over-year increase: Providence, R.I. (5.9 percent), Las Vegas (5.2 percent), Salt Lake City (4.4 percent), Orlando, Fla. (3.9 percent) and Atlanta (3.7 percent).