Dip in Rates Gives Home Buyers Temporary Affordability Relief

Mike Sorohan msorohan@mba.org

November 02, 2017

There's a lot in play when it comes to housing affordability, says Mark Fleming, chief economist with First American Financial Corp., Santa Ana, Calif.

"A dip in mortgage rates in August offset rapid price appreciation driven by the lack of supply, as existing homeowners remain reluctant to sell for fear of not being able to find something to buy," Fleming said.

However, the First American Real House Price Index, which measures price changes of single-family properties adjusted for impact of income and interest rate changes on consumer house-buying power, reported real house prices decreased by 0.4 percent between July and August but increased by 9.6 percent year-over-year. First American said consumer house-buying power increased by 0.8 percent between July and August, but fell 3.2 percent year-over-year.

As a result, Fleming said, real house prices are 38.4 percent below their housing-boom peak in July 2006 and 17.2 percent below the level of prices in January 2000. Unadjusted house prices increased by 6.1 percent in August on a year-over-year basis and are 4.2 percent above the housing boom peak in 2007.

"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."

Fleming cautioned as mortgage rates rise on the back of the last months' Federal Open Market Committee decision to reduce its portfolio of bonds and supply remains constrained, affordability will continue to decline for those seeking to achieve the goal of homeownership. "Yet, while affordability is lower than a year ago, it remains high by historic standards," he said. "Only three states and the District of Columbia are less affordable today than they were in January 2000."

The report said states with the greatest year-over-year increase in the index were Delaware (+16.2 percent), Nevada (+15.1 percent), Alaska (+14.1 percent), Massachusetts (+13.8 percent) and Washington (+13.7 percent). States with the smallest year-over-year increase were Alabama (+2.8 percent), North Dakota (+3.8 percent), Hawaii (+4.2 percent), New Jersey (+4.2 percent) and Washington D.C. (+4.6 percent).

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