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First American Chief Economist Mark Fleming: An Overvalued Housing Market May Be Returning
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Mark Fleming is chief economist with First American, Santa Ana, Calif.
In March, mortgage rates increased and affordability fell modestly by 0.1 percent compared with February, according to the Real House Price Index. On an annualized basis, affordability decreased by approximately 5 percent.
Two factors drove the year-over-year decline in affordability – a 6.2 percent annual increase in nominal house prices, according to our First American Data & Analytics House Price Index, and a 0.3 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 3.7 percent since March 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices.
In March, the median-income household nationally could afford to buy a house for no more than $350,000, assuming that the buyer put down a 5% down payment, their mortgage rate was the average rate for the month of March, and their mortgage payments take up one-third of their pre-tax income.
But the median sale price of an existing home in March, according to data from First American Data & Analytics, was also approximately $350,000. If housing is appropriately valued, house-buying power should equal or exceed the median sale price of a home. At a national level, the housing market is neither overvalued nor undervalued by this metric. The housing market was considered overvalued from June through November of last year, then modestly undervalued until March, when the median sales price and house-buying power equalized. However, examining this metric at the market level paints a more affordable picture.
What’s the Over-Under?
Of the top 50 markets tracked, 22 markets were overvalued in March, meaning the median existing-home sale price exceeded house-buying power. The number of overvalued markets has increased since our last analysis of overvalued markets in July 2022, when just 15 market were considered overvalued. The market with the highest overvaluation was San Jose, Calif., where the median consumer house-buying power in March was $723,000, significantly below the median sale price of a home at $1,430,000. In markets considered overvalued, the chronic housing supply shortage is preventing prices from adjusting downward enough to reflect the affordability reality.
Additionally, house prices are “downside sticky.” Home sellers would rather withdraw from the market than sell at lower prices.
The good news is that most of the markets we track remain undervalued by this measure, and nine markets were undervalued by $100,000 or more. Detroit, Philadelphia and Cleveland are markets considered undervalued by an average of $145,000.
The Impact of ‘Higher-For-Longer’
Reducing overvaluation can occur through lower house prices, lower mortgage rates, fast-rising incomes, or some combination of the three. As ‘higher-for-longer’ mortgage rates are increasingly likely, sellers have less incentive to sell, keeping inventory short and, all else equal, pushing prices higher. But that’s only half the story in a ‘higher-for-longer’ world. House-buying power is also reduced, which can soften demand, so it’s not a certainty that prices continue to march upward. Whether affordability drifts over or under in the coming months will depend on whether the supply-tightening response to higher rates is stronger or weaker than the demand-softening response.
(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.)