The price for purchasing a home spiked nearly 31% in February 2022 from a year earlier, the fastest growth rate in more than 30 years, according to First American Financial Corp.
First American, provider of title, settlement, and risk solutions for real estate transactions, released its February 2022 First American Real House Price Index (RHPI) this morning. The RHPI measures price changes for single-family properties nationwide, 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, the company said.
First American Chief Economist Mark Fleming said the rapid surge in prices and drop in affordability — as indicated by a 30.6% increase in the RHPI, the largest jump in the index's 30-year history — had two main causes.
“This rapid annual decline in affordability was driven by two factors – a 21.7% annual increase in nominal house prices and a nearly full percentage point increase in the 30-year, fixed mortgage rate compared with one year ago,” he said. “Rising mortgage rates impact both housing supply and demand, limiting supply by reducing the propensity of homeowners to sell and flattening demand by reducing consumer house-buying power.”
Fleming said the only way for homebuyers to mitigate the decline in affordability caused by higher mortgage rates “is with an equivalent, if not greater, increase in household income. Even though household income has increased 5.1% since February 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rapidly rising nominal prices.”
He said mortgage rates and house prices are expected to continue to rise at a pace greater than that of household income, so affordability will continue to decline “in the near term.”
“One forecast, based on an estimate of when the 10-year Treasury yield will peak, suggests that the 30-year, fixed mortgage rate will likely peak between 5 and 5.7%, but may move as high as the low 6% range,” he said.
Fleming said the RHPI can model shifts in both income and interest rates to see how they affect affordability and homebuying power.
“In the latest RHPI report reflecting February 2022 data, the 30-year, fixed mortgage rate stood at 3.8%,” he said. “Since then, rates have increased sharply, breaking the 5% barrier in mid-April. The increase in rates since February reduced house-buying power by $60,000.”
He continued, “If the average mortgage rate reached 5.5%t, assuming a 5% down payment and average household income of approximately $70,800, house-buying power falls by an additional $21,000. If rates increased even higher to 6%,, house-buying power would fall by $40,000 compared with 5%.”
Fleming cautioned that historical context is important when discussing affordability.
“An average 30-year, fixed mortgage rate of 5.5% is still well below the historical average of nearly 8%,” he said. “Even with mortgage rates at 5.5%, house-buying power is over $360,000, which is still strong and at the same level as 2018. Recency bias may have many thinking that rates below 3% and house-buying power above $450,000 is normal, but it is anything but normal from a historical perspective.
“The last two years were the exception, not the rule, and the housing market is adjusting to a not-so-new normal.”
Some highlights from the RHPI:
- Real house prices increased 5.8% between January 2022 and February 2022.
- Real house prices increased 30.6% between February 2021 and February 2022.
- Consumer house-buying power — how much one can buy based on changes in income and interest rates — decreased 3.6% between January 2022 and February 2022, and decreased 6.8% year over year.
- Median household income has increased 5.1% since February 2021 and 70.4% since January 2000.
- Real house prices are 5.7% more expensive than in January 2000.
- While unadjusted house prices are now 48.8% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 25.8% below their 2006 housing boom peak.
The five states with the greatest year-over-year increase in the RHPI are: Florida (+43.1), South Carolina (+42.8 percent), Arizona (+39.0 percent), Georgia (+38.8), and Connecticut (+35.8 percent).
There were no states with a year-over-year decrease in the RHPI.
