Housing affordability reaches lowest point in more than three decades: First American

Affordability in the housing market is as bad as it’s been in more than three decades — and relief isn’t coming this year.

That’s the conclusion of First American’s Real House Price Index (RHPI) report for May, which shows a 9% year-over-year decline in affordability. The increase in the RHPI was driven by 5.9% growth in nominal home prices and a jump of 0.6% in the 30-year fixed mortgage rate compared to a year ago.

The RHPI measures affordability by adjusting nominal home prices “for purchasing power by considering how income levels and mortgage rates influence the amount home buyers can borrow,“ the company explained.

“At the beginning of the year, we predicted affordability may end 2024 modestly higher than at the end of 2023,” First American chief economist Mark Fleming said in the report. “Unfortunately, inflation has proven stubborn and led to the Federal Reserve’s ‘higher-for-longer’ stance on interest rates, contributing to an elevated outlook for mortgage rates, while house prices have once again demonstrated their ‘downside stickiness.’”

While Fleming doesn’t see a meaningful improvement in affordability for the rest of the year, he does see it coming in 2025 if mortgage rates come down as the Federal Reserve has signaled. Other positive signs that could improve affordability are that hourly wage growth has increased by 4.1% year over year, job growth has been steady and unemployment is low.

Still, if the current levels of income growth, nominal price growth and mortgage rates hold steady through the rest of 2024, then affordability will be 45% worse than February 2022, when interest rates began to rise, First American reported.

“While affordability is likely to remain constrained for the remainder of 2024, mortgage rates are expected to come down in 2025, which would be welcome news for potential home buyers,” Fleming said in the report.

Geographically, traditionally affordable West Virginia posted the highest year-over-year gain in the RHPI at a whopping 23.2%, followed by Illinois (16%), Rhode Island (15.6%), Vermont (15.3%) and New Jersey (15.1%).

Memphis, Tennessee, led the way among the metros tracked by First American with an 18% increase in the RHPI compared to May 2023. It was followed by Cincinnati (17.8%); Providence, Rhode Island (16.4%); Seattle (16.1%); and Boston (15.5%).

First American’s report mirrors the May report from CoreLogic released this week. That report showed a 4.9% year-over-year increase in home prices and a gain of 0.6% relative to April. One meaningful deviation is that CoreLogic had New Hampshire with the highest home-price growth during the past year at 12%.