Home affordability improved in August, due mainly to lower mortgage rates, says First American. In fact, it was the first time since 2021 that affordability improved, according to the firm’s Real House Price Index.
First American, however, remains cautiously optimistic about the housing market’s future.
Although rates have dropped, home prices continue to rise, and may rise at a faster pace once rates drop more.
In addition, income growth is expected to moderate.
“National affordability on an annual basis improved in August, marking the first positive year-over-year change since 2021,” says Mark Fleming, chief economist for First American, in the report. “Two factors drove the 4.4 percent annual increase in affordability – a 3.1 percent annual increase in nominal household income and a 0.57 percentage point decrease in the 30-year, fixed mortgage rate compared with one year ago.
“Nominal house prices reached another new record high in August, but annual house price appreciation slowed for the eighth consecutive month,” he adds.
Fleming sees falling mortgage rates as a reason for optimism.
“If mortgage rates fall to 6 percent by the end of 2024, household income grows at the pre-pandemic historical annual average of 2.9 percent, and nominal house prices increase by 3.9 percent annually, affordability will improve by 7 percent at the end of the year compared with one year ago,” he says. “Industry estimates predict that 2025 will bring even lower mortgage rates – the potential for further relief in the coming year could be a game changer for those waiting to enter the housing market.”
Nominal house prices reached another new record high in August, but annual house price appreciation slowed for the eighth consecutive month. The increase in nominal house prices was not enough to offset the improved affordability from lower mortgage rates and higher household income.
First American says it expects the Fed to reduce the base rate by an additional half percentage point this year, but even more surprisingly by another full percentage point next year. In other words, the Fed expects to cut the federal funds rate down to 3.4 percent by the end of 2025, which is a much lower rate target than the 4.1 percent target the Fed had projected in June for the end of 2025.
However, if the Fed continues to slash rates and demand rises, as expected, home prices will likely increase at a faster pace. This is partly due to the fact that inventory remains constrained.
Photo: Ian MacDonald