Low mortgage rates will be key to housing affordability in the U.S. this summer. That's according to the First American Real House Price Index report, which 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 the national, state and metropolitan area levels.
"The economic fallout and impacts to the housing market from the pandemic appeared to peak in April. The number of existing-home sales fell 18% relative to March, housing starts fell 26%, and the supply of homes available for sale approached record lows," said Mark Fleming, chief economist at First American. "While historically low mortgage rates made it more affordable for those with stable incomes to buy a home, tightening credit standards and limited supply of homes for sale made it more difficult for some to obtain financing and find the home they want."
"This month’s estimate does not reflect actual household income levels in April, and therefore, house-buying power and the [index report] reflect a more positive picture than actually exists," continued Fleming. "However, we can examine some potential scenarios that can provide perspective on how the drivers of the [index] impact affordability."
The report explored what would happen if there is no change to household income or if household income dips by 1%. Fleming stated that if there was no change in household income, house-buying power would still have increased by close to $8,000 in April, compared to March.
"However, if the average household income in April fell 1% compared with the previous month (from $67,130 to $66,460), house-buying power would still be $3,500 higher than March due to low rates. But, the modest increase in house-buying power in this scenario is not enough to offset the nominal house price appreciation and affordability falls by 0.08%," said Fleming. "It’s clear that the delicate interplay between income, rates and nominal house prices determines the outcome for affordability."
According to the report, experts expect the 30-year, fixed-rate mortgage to average around 3.2% for the remainder of the year. However, the report has seen signs of an increase in house price appreciation, driven by pent-up demand from the spring home-buying season and low-inventory due to pandemic-related stay-at-home orders.
"Our research has also found that in past recessions, house prices show their ‘downside stickiness,’ meaning they remain flat or their growth slows during economic downturns, but often do not decline much. Because of this, in the near term, we anticipate nominal house price appreciation to accelerate this summer," said Fleming. "Additionally, the May Employment Situation Summary points to a decline in average hourly wages, likely resulting in falling average household income. If household income growth slows and house prices continue to rise, even today’s record-low mortgage rates may not keep affordability from declining."
Click here to read more from the First American report.