Buyer Fear of Rising Rates May Cause Increase in Home Purchases Before Spring


The November 2021 First American Real House Price Index (RHPI) report shows that real house prices increased 1.5% between October 2021 and November 2021, and increased 21% between November 2020 and November 2021. Real house prices are 5.6% less expensive than in January 2000.

“In November, year-over-year nominal house price appreciation reached 21.5 percent, the sixth consecutive month it has set a new record,” observes Mark Fleming, chief economist at First American. “According to our RHPI – which measures housing affordability based on changes in income, interest rates and nominal house prices – affordability declined 21 percent compared with a year ago, as the growth in nominal house prices combined with the 30-basis point increase in the 30-year, fixed mortgage rate vastly outpaced the 4.4 percent increase in income. Affordability is likely to decline further in 2022, because both mortgage rates and nominal house prices are expected to rise.”

The RHPI 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 over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

“The Federal Reserve has signaled the end of the easy money era is near,” Fleming adds. “In order to combat inflation, the Fed is expected to increase rates as soon as March. Mortgage rates typically follow the same path as long-term bond yields, which are expected to increase due to the Fed’s tightening of monetary policy, higher inflation expectations and an improving economy. The consensus among economists is that the 30-year, fixed mortgage rate will increase from its November rate of 3.1 percent to 3.7 percent by the end of 2022. Some forecasters predict rates will reach 4 percent, which is still historically low, but well above what buyers have grown accustomed to in recent years.”

Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.6% between October 2021 and November 2021, and increased 0.4% year over year.

“We can use the RHPI to model shifts in income and interest rates and see how they either increase or decrease consumer house-buying power and affordability,” said Fleming. “When mortgage rates increase, holding income constant, consumer house-buying power decreases.

Median household income has increased 4.4% since November 2020 and 68% since January 2000. While unadjusted house prices are now 42.7% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 33.8% below their 2006 housing boom peak.

“If the average mortgage rate remained at its current level of approximately 3.5 percent through the spring home-buying season, assuming a 5 percent down payment and holding average household income constant at the November 2021 level of $69,800, house-buying power falls by approximately $25,000,” continues Fleming. “If rates increase to the anticipated end of 2022 level of 3.7 percent, house-buying power would fall by $36,000. Finally, if mortgage rates reach 4 percent as some industry experts anticipate, house-buying power would fall by nearly $52,000 compared with November 2021.”

The five states with the greatest year-over-year increase in the RHPI are: Arizona (+33.1%), South Carolina (+28.1%), Florida (+28.0%), Georgia (+27.4%) and Connecticut (+26.2%). There were no states with a year-over-year decrease in the RHPI.

“Rising mortgage rates impact affordability, but one of the root causes of rising mortgage rates is an improving economy, and an improving economy often leads to stronger wage growth. Rising household income can blunt the negative impact that higher rates have on house-buying power,” states Fleming. “In fact, our estimate of average household income increased approximately 0.6 percent on a monthly basis in November 2021. If incomes continue to increase at this rate through the end of 2022, the income growth would reduce the projected end-of-year 2022 decrease in house-buying power to just $700, instead of $36,000.”

Among the core-based statistical areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Phoenix, Ariz. (+34.6%); Charlotte, N.C. (+34%); Tampa, Fla. (+32%); Atlanta, Ga. (+30%), and Jacksonville, Fla. (+29.6%). Among the CBSAs tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

Fleming suggests that it might be beneficial for potential home buyers to buy now before rates rise further. He believes that the fear of missing out (FOMO) on lower mortgage rates may invigorate the housing market before the spring.

“However, housing supply tends to increase in the spring months as more sellers list their homes for sale,” he comments. “While home buyers may have FOMO because of rising rates, they may not want to succumb to the fear of better options, or ‘FOBO,’ because there may be a better home option or options when there’s more homes for sale, even if it means they may pay more.”

The next release of the First American Real House Price Index will take place the week of February 21, 2022 for December 2021 data.

Read the full report here.

Notify of
Inline Feedbacks
View all comments