First American’s Mark Fleming–How ‘Higher for Longer’ Impacts the Housing Market

Mark Fleming

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

In January, mortgage rates declined and affordability improved by nearly 2 percent compared with December, according to First American’s Real House Price Index. However, on an annualized basis, affordability decreased by approximately 7 percent.

Two factors drove the sharp annualized drop in affordability: a 7.1 percent annual increase in nominal house prices, according to the First American Data & Analytics House Price Index, and a 0.4 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 3.9 percent since January 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices.

The Housing Implications of “Higher for Longer”

At the end of 2023, the market was expecting that the Fed would cut rates six to seven times in 2024. However, with the economy and labor market proving resilient and inflation remaining stickier than anticipated, the Fed seeks further assurance that inflation is headed sustainably towards their 2 percent target. As a result, expectations for rate cuts have pivoted, and the majority expect three or fewer rate cuts this year.

While the 30-year fixed mortgage rate isn’t directly tied to Fed actions, it is loosely benchmarked to the 10-year Treasury yield. Many factors can drive the 10-year Treasury yield up and down, but one major force is inflation expectations. The higher the expectations for future rates of inflation, the higher the yields on the 10-year, and the higher the mortgage rate. With inflation proving stickier than expected and the market believing that rates will stay “higher for longer,” mortgage rate expectations have drifted higher for this year. So, what does this mean for affordability?

Expect Affordability to Improve Modestly by Year End

The RHPI measures affordability by adjusting the First American Data & Analytics House Price Index for purchasing power – how income levels and interest rates influence the amount one can borrow. These factors are expected to change in the following ways in 2024:

Income Growth Expected to Moderate

The labor market remained strong in January, as rising wages resulted in higher household income. Annual hourly wage growth increased by 4.4 percent compared with a year earlier, job growth remained steady, and the unemployment rate stayed low. The rise in wage growth contributed to a 3.9 percent year-over-year increase in median household income. The labor market faces a persistent labor shortage, putting upward pressure on household income, but that shortage has narrowed from the peak of 2022, and will likely continue to narrow in 2024, which should drag the pace of household income growth towards historical norms.

Mortgage Rates Projected to Retreat from 2023 Peaks

Mortgage rates reached a recent peak of 7.6 percent in October 2023, but have since drifted below 7 percent. The average among mortgage industry forecasts projects that mortgage rates will end 2024 at approximately 6.25 percent, as inflation is expected to recede, and the Fed is expected to begin cutting rates.

Nominal House Prices Likely to Rise

The housing market remains undersupplied relative to demand, which puts upward pressure on prices. As a result, annual nominal house price appreciation will likely continue to remain positive nationally, but return closer to the historical average of 3-to-4 percent, as the housing market adjusts to the reality of higher mortgage rates, and affordability constraints remain. The average of different industry forecasts suggests a 3.7 percent annual increase in nominal house price growth by the end of 2024. 

Still Reason for Optimism

If mortgage rates fall to 6.25 percent by the end of 2024, household income grows at the pre-pandemic historical average of 2.9 percent compared with the end of 2023 and nominal house prices increase by 3.7 percent annually, affordability will improve by a little over 3 percent at the end of the year compared with January.

Even modest improvements in housing affordability will be welcome news for buyers currently sitting on the sidelines. However, even at this level, affordability will remain nearly 38 percent worse than in February 2022, just before the Fed started increasing rates. The industry predicts that 2025 will bring even lower mortgage rates – the sooner the better for prospective home buyers.


First American Data & Analytics

Freddie Mac

Census Bureau

(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.)