Affordability remains a challenge amid market slowdown

While household income increased 4.9% since March 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices, Fleming added.

The economist explained that reduced affordability prompts some buyers to pull back from the market and sellers to adjust their price expectations. “The housing market is slowing down by design as the Federal Reserve tightens monetary policy in order to tame inflation,” Fleming said.

“Early data signals the housing market is normalizing – our preliminary nominal house price index for the months of April and May indicates annual house price growth is decelerating. Historical data provides helpful perspective on how house prices react to rising mortgage rates.”

Rising mortgage rates and declining affordability have been two of the defining trends of the 2022 housing market, Fleming noted. Yet mortgage rates and their effect on home prices may not be as straightforward as many think.

He added: “More often than not, house price appreciation has been resistant to rising mortgage rates. One exception is the 1994 rising-rate era, when house prices declined slightly and briefly. Another exception is the 2005-06 period, otherwise known as the US housing bubble, when house prices peaked in early 2006 and started to decline through 2006 and 2007. The rising rate period during the housing bust of 2008 and 2009 is another key exception.”