Housing affordability continued to decline in July, according to the first U.S. chief economist Mark Fleming. The first U.S. real house price index for July 2022 mirrored that decline, he said, jumping nearly 54% year-over-year.
“For homebuyers, there are few options to mitigate the loss in affordability caused by a higher mortgage rate and rising prices,” Fleming said in a statement. “One way to offset declining affordability is to increase household income by an equivalent, if not greater, amount. Another option is to choose an adjustable rate mortgage, which usually has a lower rate than a 30-year fixed rate mortgage.
Although these options have helped to increase the purchasing power of a home, they have not been enough to compensate for the loss of affordability due to the rise in rates and the rapid rise in nominal prices in July.
“As affordability declines, potential buyers pull out of the market, causing annual home price appreciation to moderate. Annual home price growth peaked in March at nearly 21%, but has since slowed to a still high 16.7% in July,” Fleming said. “As the housing downturn continues, the pace of house price moderation will vary across markets. , with prices decelerating faster in some markets than in others. By analyzing which markets are considered overvalued, we can identify markets at risk of a faster price deceleration.
He said in July most of the top 50 markets tracked by First American remained undervalued, with some significantly undervalued. For example, the Detroit, Philadelphia and Pittsburgh markets were considered undervalued by nearly $200,000.
“However, real estate is local and not all markets are created equal,” Fleming said. “There were 15 markets considered overvalued in July, meaning that the median selling price of existing homes exceeded the buying power of homes. A year ago, only four markets were considered overvalued.
San Jose, Calif., was the most overvalued market, with median consumer buying power in July at just over $770,000, just over half the median selling price of a home in $1.46 million.
“The overvaluation was calculated based on July 2022 house prices and mortgage rates, but mortgage rates have since risen,” Fleming said. “If we hold household income and median selling prices constant at their July 2022 levels, the increase in the average 30-year fixed mortgage rate from 5.4% in July to 6% in September increases the number of of overvalued markets, adds San Antonio, Miami, Tampa, Florida and Salt Lake City to the list and brings the total to 19.
Where does the housing market go from here?
“Household overvaluation is a function of three factors: house prices, household income and mortgage rates,” Fleming said. “The preliminary nominal house price index from First American Data & Analytics indicates that the deceleration in house prices is likely to continue in September. At the same time, the median household income should continue to rise, as the imbalance between supply and demand in the labor market persists, which puts upward pressure on wages.
“While mortgage rates are expected to continue to climb over the next few months, much of the rapid rate increase is likely behind us. While markets seen as overvalued may have to adjust to the not-so-new reality of higher mortgage rates, housing market fundamentals still support a moderation in annualized house price appreciation rather than a sharp decline.