First American’s Mark Fleming: Affordability Crunch Likely Unchanged Through 2024

Mark Fleming

Mark Fleming is chief economist at First American, Santa Ana, Calif.

Apart from the fall of 2023, affordability in May reached its lowest level in over three decades. On a year-over-year basis, affordability declined by nearly 9%.

Two factors drove the sharp annualized drop in affordability – a 5.9% annual increase in nominal house prices, according to our First American Data & Analytics House Price Index, and a 0.6 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago.

For home buyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income. Even though household income increased 4.1% since May 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices.

At the beginning of the year, we predicted affordability may end 2024 modestly higher than at the end of 2023. This forecast was based on the industry consensus at the time that mortgage rates would fall to 6.25% and house prices would slow to 3.7% by the end of 2024. Unfortunately, inflation has proven stubborn and led to the Federal Reserve’s “higher-for-longer” stance on interest rates, contributing to an elevated outlook for mortgage rates, while house prices have once again demonstrated their “downside stickiness.”

Mid-Year Outlook for Affordability: Little Change Expected

The Real House Price Index measures affordability by adjusting the First American Data & Analytics House Price Index for purchasing power by considering how income levels and mortgage rates influence the amount home buyers can borrow. Examining how each of these factors may change provides insight into the outlook for affordability for the remainder of 2024.

Income Growth Expected to Moderate: The labor market continued to impress in May, as rising wages resulted in higher household income. Annual hourly wage growth increased by 4.1% compared with a year earlier, job growth remained steady, and the unemployment rate stayed low. The increase in wage growth contributed to a 4.1% year-over-year increase in median household income. The labor market continues to face a labor shortage, putting upward pressure on wages, and therefore household income, but that shortage has narrowed significantly from the peak of 2022.

The labor shortage is likely to narrow further and perhaps disappear by the end of 2024, which should slow the pace of wage growth and household income toward historical norms.

Mortgage Rates Projected to Retreat from 2023 Peak, But Remain Elevated: Mortgage rates reached a recent peak of 7.6% in October 2023, but have since drifted lower to 7% in May. Average industry forecasts project that mortgage rates will end 2024 at approximately 6.7%, as inflation is expected to recede, and the Fed is expected to cut interest rates at least once.

Nominal House Prices Likely to Rise: The housing market continues to suffer from an imbalance between housing supply and demand, which puts upward pressure on prices. However, a recent increase in inventory, coupled with a pullback in demand due to affordability constraints, has softened annual house price growth.

The deceleration is likely to persist for the remainder of the year. As a result, the average of different industry forecasts suggests annual house price growth to slow to 4.6% by the end of 2024.

Affordability Relief Unlikely Until 2025

Assuming that mortgage rates fall to 6.7% by the end of 2024, household income grows at the pre-pandemic, 10-year historical average of 3.3%, and nominal house prices increase by 4.6% annually, then affordability as measured by the RHPI will end the year essentially flat compared to the end of 2023. At this level, affordability will remain 45% worse than in February 2022, just before the Fed started increasing rates.

While affordability is likely to remain constrained for the remainder of 2024, mortgage rates are expected to come down in 2025, which would be welcome news for potential home buyers.

May 2024 Real House Price Index Highlights

The First American Data & Analytics’ RHPI showed that in May 2024:

Real house prices increased 0.6% between April 2024 and May 2024.

Real house prices increased 8.7% between May 2023 and May 2024.

Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 0.3% between April 2024 and May 2024, and decreased 2.5% year over year.

Median household income has increased 4.1% since April 2024 and 91.5% since January 2000.

Unadjusted house prices are now 59.8% above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 2.3% above their 2006 housing boom peak.

Real house prices are 46.3% more expensive than in January 2000.

May 2024 Real House Price State Highlights

The five states with the greatest year-over-year increase in the RHPI are: West Virginia (+23.2%), Illinois (+16.0%), Rhode Island (+15.6%), Vermont (+15.3%), and New Jersey (+15.1%).

There were no states with a year-over-year decrease in the RHPI.

May 2024 Real House Price Local Market Highlights

Among the Core Based Statistical Areas tracked by First American Data & Analytics, the five markets with the greatest year-over-year increase in the RHPI are: Memphis, Tenn. (+18.0%), Cincinnati (+17.8%), Providence, R.I. (+16.4%), Seattle (+16.1%), and Boston (+15.5%).

Among the Core Based Statistical Areas tracked by First American Data & Analytics, Denver (-1.4%) was the only market with a year-over-year decrease in the RHPI.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)