First American: Rising Mortgage Rates, Stagnant Incomes Create Home Affordability Crisis


First American Financial Corp.’s May 2022 First American Real House Price Index (RHPI) shows real house prices increased 50.8% year over year but median household income has only increased 4.6% since May 2021 and 71.7% since January 2000.

The index 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.

“In May 2022, the Real House Price Index (RHPI) jumped up by 50.8 percent year over year, which is the fastest growth in the more than 30-year history of the series. This rapid annual decline in affordability was driven by a 20.1 percent annual increase in nominal house prices and a 2.3 percentage point increase in the 30-year, fixed-mortgage rate compared with one year ago,” says Mark Fleming, chief economist at First American.

Real house prices are 28.7% more expensive than in January 2000. They increased 3.8% between April 2022 and May 2022, and increased 50.8% between May 2021 and May 2022.

“For home buyers, one way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income,” adds Fleming. “Even though household income increased 4.6 percent since May 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices.”

Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 2.6% between April 2022 and May 2022, and decreased 20.4% year over year.

“As affordability wanes, potential home buyers are looking to adjustable-rate mortgages (ARM) for the lower rate benefit,” continues Fleming. “Given the lower mortgage rate that is typically offered on an ARM today, compared with the 30-year, fixed-rate mortgage, ARMs offer prospective first-time home buyers an option to recapture some house-buying power in a rising rate environment.”

While unadjusted house prices are now 54.1% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 9.3% below their 2006 housing boom peak.

“Since the beginning of 2022, the 30-year, fixed mortgage rate has increased 1.8 percentage points. While the rates on ARMs have increased too, ARMs have lower rates than 30-year, fixed-rate mortgages,” states Fleming. “According to the Mortgage Bankers Association’s weekly survey, the average rate on the 30-year, fixed-rate mortgage was 5.45 percent in May, while the average rate on a five-year ARM was 4.46 percent.”

The five states with the greatest year-over-year increase in the RHPI are: Florida (+72.1%), South Carolina (+63.3%), Arizona (+59.1%), Georgia (+57.8%) and North Carolina (+56.6%). There were no states with a year-over-year decrease in the RHPI.

“Consumer house-buying power, how much one can buy based on average household income and a given mortgage rate, increases when the mortgage rate drops,” mentions Fleming. “In fact, at those rates, an ARM increases consumer house-buying power by nearly $44,000 when compared with a traditional 30-year, fixed-rate mortgage. This could be a game-changer for many first-time home buyers.”

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: Tampa, Fla. (+66.7%), Raleigh, N.C. (+65.9%), Charlotte, N.C. (+65.7%), Miami (+63.1%) and Orlando (+62.9%). Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

“Because ARMs offer a lower mortgage rate, there has been a steady increase in the share of ARM loans as mortgage rates have increased. For the month of May, the average share of ARM loans was up to 9.8 percent, compared with 3.9 percent one year ago,” says Fleming. “As all mortgage rates continue to increase, the share of ARM financing will likely increase.”

“While ARMs were a symbol of the housing market crash, today’s ARMs are very different. They offer reduced risk of significant payment shock when the fixed-rate period ends and rates become adjustable,” said Fleming. “As long as the ‘spread’ between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year, fixed-mortgage rate.”

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