Affordability May Rebound in 2023, According to First American Real House Price Index

Source: Yahoo! — 

SANTA ANA, Calif., December 26, 2022–(BUSINESS WIRE)–First American Financial Corporation (NYSE: FAF), a premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today released the October 2022 First American Real House Price Index (RHPI). 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.

Chief Economist Analysis: Real House Prices Increased 8.7 Percent Month Over Month

“Affordability continued to suffer in October 2022, as the Real House Price Index (RHPI) jumped up by 68 percent on an annual basis. This rapid annual decline in affordability was driven by a 12 percent annual increase in nominal house prices and a 3.8 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago,” said Mark Fleming, chief economist at First American. “Even though household income increased 3.4 percent since October 2021 and contributed positively to consumer house-buying power, it was not enough to offset the affordability loss from the dramatic surge in mortgage rates and fast-rising nominal prices.

“As affordability wanes and prompts buyers to pull back from the market, nominal house price appreciation has slowed. Nationally, annual nominal house price growth peaked in March at nearly 21 percent but has since decelerated by more than 8 percentage points to 12 percent in October,” said Fleming. “Does waning house price appreciation signal that we may be past the worst of the affordability crash and affordability may be poised to rebound in 2023?”

Economic Dynamics Influencing Affordability Heading into 2023

Income Likely to Flatten: “The labor market continued to impress in October, as rising wages resulted in higher household income. Annual hourly wage growth increased by 4.9 percent compared with a year earlier, job growth is steady, and the unemployment rate remains low. The rise in wage growth contributed to a 3.4 percent year-over-year increase in median household income. Compared with October 2021, the rise in household income alone increased consumer house-buying power by approximately $16,000,” said Fleming. “But the labor market faces growing uncertainty, as the Federal Reserve continues to tighten monetary policy to curtail demand and slow inflation. Next year, it will be increasingly difficult for the Fed to fight inflation so intensely without broader impacts to employment. For now, the labor market continues to face a labor shortage, which puts upward pressure on wages and, therefore, household income. The labor shortage will likely wane in 2023, meaning the pace of wage growth will likely slow as well.”