Home affordability drops despite consumer purchase-power growth

Home affordability declined this past September despite two of three key drivers shifting in favor buyers, according to the latest Real House Price Index (RHPI) report from First American Financial Corp.

From August to September, the 30-year fixed mortgage rate shed 0.01 percentage points while household income grew 0.03%, First American’s data shows. Both factors positively impacted consumer homebuying power, or how much a potential homebuyer can afford based on changes in income and interest rates. Homebuying power grew by 0.2% between August and September of this year and 15.8% on a year-over-year basis. 

But home prices, the third factor in the RHPI, outweighed the shifts in income and rates.

“Nominal house-price appreciation jumped 1.1 percent in September, outpacing the benefits of rising house-buying power on affordability,” said Mark Fleming, First American’s chief economist. “Accordingly, the RHPI increased 0.9 percent month over month. Increases in the RHPI indicate a decline in affordability, and September’s decline in affordability was the largest month-over-month affordability decline since November 2018.”

The RHPI increased month over month in September in 41 of the 44 markets tracked by First American, with New York City seeing the largest affordability decrease. The monthly rise in the RHPI is a marked departure from the long-term trend of 2019, Fleming noted. Despite of the month-over-month growth in the index, all 44 markets were significantly more affordable than they were in September 2018.

Weak inventory — a consistent culprit for recent home-price growth — is rearing its ugly head again, Fleming said.

“In 2019, declining mortgage rates have increased house-buying power, fueling greater demand. However, when demand increases for a scarce (limited or low supply) good, prices will rise faster,” Fleming explained. “While year over year, the RHPI shows an improvement in affordability, the increase in house-buying power in September was not enough to offset nominal house-price gains compared with August.

“One month does not make a trend, yet these markets demonstrate the dynamic we expected to see — the consistent growth in house-buying power over 2019 has boosted demand in a supply-constrained market, putting upward pressure on house-price appreciation,” Fleming added. “Faster nominal house-price appreciation can erode, or even completely eliminate, the boost in affordability from increasing house-buying power. … The question for 2020 is, where does house-buying power go from here?”


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