Powerful Market Forces Reduce Affordability, First American Reports

April 24, 2018

While the supply squeeze and rising mortgage rates are powerful forces working against housing affordability, homeowners are gaining equity as the economy remains strong, according to First American’s latest Real House Price Index.

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.

“Two dynamics are restricting housing supply this spring, namely an increasing number of homeowners are rate-locked, and the prisoner’s dilemma facing homeowners,” said Mark Fleming, First American’s chief economist. “The supply squeeze is already impacting the market. Existing-home sales, which account for roughly 90 percent of U.S. home sales, declined 1.3 percent in February compared with a year ago. The market is underperforming its potential by an estimated 300,000 seasonally adjusted annualized rate of sales,” said Fleming. “The risk of selling one’s home in a market with a shortage of inventory keeps existing homeowners from selling, preventing more supply from entering the market. This increases competition for homes and puts pressure on prices. Not surprisingly, unadjusted house prices increased 5.9 percent in February compared with a year ago.”

In addition, the average 30-year, fixed rate mortgage rose to 446 percent. This is the highest level since January 2014. Economists believe rates will approach 5 percent by the end of 2018.

Despite the supply squeeze and rising mortgage rates, homeowners continue to gain equity as the economy remains strong. Fleming said Millennial demand for homeownership is growing and builders remain confident, demonstrated by the number of homes under construction reaching its highest point in more than a decade in February.

“The conditions driving the supply squeeze, upward pressure on prices and consequently lower affordability are likely to continue through 2018,” said. “However, some relief may be on the horizon, as more homes are on the way and income gains are offsetting rising interest rates. That’s good for the housing market.”

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