Housing affordability plummeted in last year: First American Financial

“For home buyers, one way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income. Even though household income increased 4.6% since May 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.”

According to the RHPI, consumer house-buying power decreased by 2.6% month on month and 20.4% year over year. The median household income increased by 4.6% since the previous year and 71.7% since January 2000.

Real house prices, meanwhile, increased 3.8% month on month and 50.7% year over year, equating to a 28.7% jump since January 2000. Additionally, unadjusted house prices were 54.1% above the housing book peak seen in 2006, and real house prices stayed 9.3% below the 2006 peak.

The dip in housing affordability will likely push potential home buyers to consider adjustable-rate mortgages (ARMs) over the 30-year fixed rate mortgage, added Fleming. Due to its lower rate benefits, ARMs provide first-time buyers “an option to recapture some house-buying power in a rising rate environment.”

“Because ARMs offer a lower mortgage rate, there has been a steady increase in the share of ARM loans as mortgage rates have increased,” he said. “For the month of May, the average share of ARM loans was up to 9.8%, compared with 3.9% one year ago. As all mortgage rates continue to increase, the share of ARM financing will likely increase.”