Housing affordability takes biggest plunge since 2018

Housing affordability dropped in April at the fastest pace since December 2018 and won’t be improving any time soon, according to First American.

The Real House Price Index — a metric that adjusts residential property prices for income and interest rate fluctuations — grew 0.7% from March and 7% year-over-year. When RHPI rises, home buyer affordability falls. Median household income increased to $74,249 from $73,455 monthly and $70,542 annually while house-buying power jumped to $505,904 from $499,060 the month before and $465,906 in April 2020.

Despite purchasing power increasing for the 16th straight month, it didn’t keep up with the 16.2% home price growth from a year ago, a likely trend moving forward. Those growth rates need to flip in order for consumer affordability to increase but a combination of rising mortgage rates and the low inventory environment should keep accelerating it in the same direction. The sustained surges in property prices also present risk for borrowers.

Under current conditions, household income would need to increase by 5% to offset the projected rise in interest rates by 2021’s end, according to First American Chief Economist Mark Fleming.

“While nominal house price growth may moderate due to the affordability squeeze on buyers who are on the margin, the severe supply-demand imbalance means the housing market is unlikely to cool enough to result in a material improvement in affordability,” Fleming said in the report. “It will take years for supply to catch up to demand and, in the meantime, any new housing inventory will be very quickly absorbed by the existing demand.”

Arizona led all states with an annual rise of 18.3% in RHPI, outpacing Washington’s 16.1%, Vermont’s 15.3% and Wyoming’s 15.2%. No states experienced year-over-year RHPI decreases in April but Kentucky had the lowest growth at 2.3%, followed by 2.9% in Iowa and 3.5% in Illinois.

Among the 50 largest housing markets, RHPI grew the most annually in Phoenix at 20.8%, Kansas City, Mo., at 20.52%, Seattle at 18.21% and Tampa, Fla., at 16.55%. Only San Francisco fell from April 2020, declining 0.68%, then came increases of 0.43% in Riverside, Calif., and 1.74% in Miami — modest gains that make home buying cheaper than renting in those metro areas.