Housing Affordability Improved For Second Consecutive Month In December
If mortgage rates fall to 5.7 percent by the end of 2023 as an average of leading industry forecasts suggest, house-buying power would increase by $25,500 compared with December 2022.
First American Financial Corporation (NYSE: FAF), a premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry released the December 2022 First American Real House Price Index (RHPI). The RHPI 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 national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
Chief Economist Analysis: Real House Prices Decreased 4.3 Percent Month Over Month
“While affordability has fallen 48 percent since December 2022, as measured by the Real House Price Index (RHPI), affordability has improved for two straight months. Nominal house price appreciation has slowed dramatically in response to dampened demand. Nationally, annual nominal house price growth peaked in March at 21 percent but has since decelerated by more than 15 percentage points to 5.8 percent in November,” said Mark Fleming, chief economist at First American. “In November and December, falling mortgage rates and rising household incomes improved affordability by nearly 6 percent compared with October.”
“Yet, as discussed in a previous analysis, affordability in the short run will be largely dictated by movements in mortgage rates and any increase in affordability may dissipate as mortgages rates have again drifted higher again in February,” said Fleming. “However, the average forecast of three leading housing authorities is that the 30-year, fixed mortgage rate will decrease from its December rate of 6.4 percent to 5.7 percent by the end of 2023.”
Average Industry Forecasts Expect Rates to Fall by end of 2023, Boosting Affordability
“We can use the RHPI to model shifts in mortgage rates and see how they either increase or decrease consumer house-buying power and affordability,” said Fleming. “When mortgage rates decrease, holding income constant, consumer house-buying power increases and vice versa.
“Mortgage rates jumped in early February due to market expectations that inflation will persist, thereby requiring the Federal Reserve to remain restrictive for longer. If rates return to the October peak of approximately 7 percent, assuming a 5 percent down payment and holding average household income constant at the December 2022 level of approximately $74,700, house-buying power would fall by $22,000,” said Fleming. “If mortgage rates fall to 5.7 percent by the end of 2023 as an average of leading industry forecasts suggest, house-buying power would increase by $25,500 compared with December 2022.”
Looking Past the Week-to-Week Volatility in Mortgage Rates
“While rates may bounce around on a week-to-week basis as new economic reports shift the outlook for inflation, the industry expectation is that inflation will improve throughout the year,” said Fleming. “As a result, if rates move lower throughout the year and affordability continues to improve, it could encourage both buyers and sellers to jump back into the market.”
December 2022 Real House Price Index Highlights
- Real house prices decreased 4.3 percent between November 2022 and December 2022.
- Real house prices increased 48.3 percent between December 2021 and December 2022.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 4.9 percent between November 2022 and December 2022, and decreased 28.6 percent year over year.
- Median household income has increased 4.2 percent since December 2021 and 79.6 percent since January 2000.
- Real house prices are 34.2 percent more expensive than in January 2000.
- Unadjusted house prices are now 47.7 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 6.1 percent above their 2006 housing boom peak.
December 2022 Real House Price State Highlights
- The five states with the greatest year-over-year increase in the RHPI are: Florida (+57.6), Vermont (+57.0 percent), Alabama (+56.8 percent), Maryland (+54.0 percent), and New Hampshire (+53.9 percent).
- There were no states with a year-over-year decrease in the RHPI.
December 2022 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Miami (+67.8 percent), Indianapolis (+66.6 percent), Hartford, Conn. (+57.4 percent), Jacksonville, Fla. (+56.9 percent), and Orlando, Fla. (+56.1 percent).
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.
The next release of the First American Real House Price Index will take place the week of March 27, 2023 for January 2022 data.
The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2023 by First American. Information from this page may be used with proper attribution.
About First American
First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $7.6 billion in 2021, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2022, First American was named one of the 100 Best Companies to Work For by Great Place to Work® and Fortune Magazine for the seventh consecutive year. More information about the company can be found at www.firstam.com.