First American: Rising interest rates finally takes toll on home affordability

Mortgage & Real Estate

November brought a reversal to the growing home affordability with a sudden drop, according to First American Financial Corp.’s Real House Price Index.

What the company calls “real house prices” increased 4.4% from October to November, reversing the decreasing trend.

“Real purchasing-power adjusted house prices jumped 4.4% month-over-month, reversing a six-month trend of decreases,” First American Chief Economist Mark Fleming said. “Year-over-year, real house prices have increased 2%.”

“The shift in real house prices signals a decrease in affordability, driven primarily by rising mortgage rates,” Fleming said. “However, while rates are increasing, they remain very low from a historical standpoint.”

The RHPI measures price changes of single-family homes, but adjusts it for the impact of income and interest rate changes on consumer home-buying power. By these standards, real home prices are 37.1% lower than their housing-boom peak in July 2006, while unadjusted home prices remain 0.6% above the peak.

Real home prices are up 1.7% from November 2015, according to the index. This is compared to the unadjusted increase of 5.4% from 2015.

Fleming explained how wages and the rising interest rates played into November’s increase in real home prices.

“Meaningful gains in wages help offset some of the decrease in affordability,” he said. “Even as rates rise above 4%, housing, on a purchasing-power adjusted basis, continues to be as affordable as it was almost 18 years ago in April 1999.”

However, the fourth quarter GDP report showed a slow-down in wages, leading some experts to question its impact on home affordability.

“We saw a widespread decrease in affordability in November, as all but three of the 43 major markets First American tracks saw increasing year-over-year growth in real house prices,” Fleming said. “Yet, my research suggests that rising mortgage rates will, over time, moderate price growth more into alignment with the current pace of income growth.”

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