Escalating home prices negate affordability gains the average homebuyer attained from low interest rates and higher incomes, according to the Real House Price Index (RHPI) published by First American Financial Corp.
The index measures the price changes of single-family properties adjusted for the impact of income and interest rates on consumer homebuying power at national, state and metropolitan levels. First American says its RHPI is considered a measure of housing affordability because it adjusts for house-buying power.
Seattle was among five markets with steep year-over-year affordability drops. The Emerald City declined 20.1%, second only to Phoenix, which dropped 22.7%. Also on the “top five” list were Kansas City, Missouri (-19.6%), Tampa, Florida (-17.8%) and Las Vegas (-17.2%). Compared to most other markets, Seattle’s decline was attributed to faster nominal house price growth and lower household income.
Affordability declined in 49 of the 50 major markets in index for May. It also marked the third consecutive month of declining affordability, following a two-year streak of rising affordability, although analysts noted local trends can vary greatly from city to city.
“The decline in May occurred even as two of the three key drivers of the RHPI, household income and mortgage rates, swung in favor of greater affordability relative to one year ago,” noted First American Chief Economist Mark Fleming.
“Lower mortgage rates and higher household income compared with one year ago propelled an 11% increase in house-buying power. However, surging house-buying power drives demand, and rising demand in a supply constrained market accelerates nominal house price appreciation,” Fleming said. He suggested affordability trends in the coming months “will depend on the supply and dynamics behind nominal house price appreciation – dynamics which will play out differently in each market.”
First American is a global provide of title insurance, settlement services and risk solutions for real estate transactions. The next release of its RHPI is scheduled for the week of November 23.