Rates, Incomes Inch Housing Affordability Upward

Housing is more affordable now—but not because of home prices. According to the Real House Price Index (RHPI) released by First American today, it’s low mortgage rates that are driving affordability upward for buyers.

The RHPI, which takes into account income, interest rates, and home prices across the nation, shows real house prices up 9.6 percent over the year, though they dropped 0.4 percent between July and August. Prices are also down 38.4 percent below their peak, seen in July 2006, and 17.2 percent under January 2000 levels.

Unadjusted, home prices increased 6.1 percent between August 2016 and August 2017, largely due to supply issues, First American reported.

“According to the National Association of Realtors, the number of existing homes listed for sale declined to a 4.2-month supply in September, which marked the 28th consecutive month of year-over-year declines in inventory levels,” according to First Am. “The lack of supply is driving unadjusted house prices higher.”

Still, despite rising nominal prices, housing is getting more affordable thanks to lower rates and better incomes.

“Lower mortgage rates in August compared with July, combined with a modest 0.1 percent month-over-month increase in wages, helped offset rising nominal house prices, producing a slight 0.4 percent increase in affordability in August,” First Am reported.

Overall, consumer house-buying power—or “how much one can buy based on changes in income and interest rates,”—rose 0.8 percent from July to August. Those interested in buying a home shouldn’t be too optimistic, though, according to First Am’s Chief Economist Mark Fleming.

“Though consumer house-buying power improved in August, affordability is likely to fade as mortgage rates are expected to rise in the months to come, but lower affordability is only significant to potential first-time buyers,” Fleming said. “Existing homeowners with fixed-rate mortgages benefited from the rising prices with increased equity. If you're renting and thinking of buying, then now is the time."

Over the past year, affordability has declined more than 9 percent, Fleming said.

Delaware had the greatest increase in real house prices over the last year, with a jump of 16.2 percent. Nevada, Alaska, Massachusetts, and Washington also made the top five.

The smallest increase in real house prices was seen in Alabama, where they rose just 2.8 percent. North Dakota, Hawaii, New Jersey and Washington D.C. also posted lower year-over-year increases.

See the full RHPI at FirstAm.com.