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Rising home prices wipe out affordability gains brought on by low interest rates, higher income

by John Yellig

Steep home prices crimped housing affordability in March for the first time since 2019, despite a solid boost from low mortgage rates and higher income, First American Financial Corp. said, citing its Real House Price Index.  

Higher income, backed up by lower mortgage rates, has expanded the financial reach of the average homebuyer. However, an increased demand for homes has concurrently driven up prices, negating two of the three main factors in the index, First American said in a press release.  

“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,” chief economist Mark Fleming said. “In March, the final component of the RHPI, nominal house prices, appreciated at its fastest annual pace since 2005, 14.8%, wiping out any affordability boost from rising house-buying power.  

First American’s 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.  

Geographically, the drop in affordability was widespread, according to First American.  

The five markets with the greatest year-over-year declines in affordability were Kansas City, Mo.; Phoenix; Tampa, Fla.; Seattle; and Austin, Texas.  

“In March, Kansas City had the greatest year-over-year decrease in affordability, mostly due to the 4.3% annual decline in household income and a 16.5% increase in nominal house prices compared with a year ago,” Fleming said. “Phoenix and Tampa both had even faster nominal house price appreciation than Kansas City, but household incomes held steady in both markets, so the relative affordability loss was less than in Kansas City. Seattle and Austin faced both faster nominal house price growth and lower household income, fueling declines in affordability in both cities.” 

 

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