Housing affordability still high, despite increasing home prices

Aly J. Yale
Aly J. Yale
The Mortgage Reports Contributor
February 1, 2018 - 2 min read

Incomes, interest rates have kept affordability in check

Despite rising home prices, American housing is actually quite affordable. According to the latest Real House Price Index from First American, today’s home buyers have “historically high levels of house-purchasing power.”

Affordability crisis ‘over-stated’

According to Mark Fleming, First American’s chief economist, “talk of an affordability crisis is over-stated.” In fact, consumer house-buying power – the how much someone can buy based on average income, interest rate and home price – is actually up over the year.

House-buying power rose by nearly a full percent from November 2016 to November 2017. And though real home prices increased 5 percent over the year, they’re still 37.7 percent below their 2006 peak. They’re also more than 16 percent below 2000’s numbers.

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Incomes are up, but they’re not keeping pacing with rising home prices. Still, according to Fleming, that’s not a concern just yet.

“Overlooked in the comparison of income growth and unadjusted house price growth is that a change in household income is not the only factor that influences how much home one can afford to buy,” Fleming said. “A consumer’s house-buying power, how much one can afford to buy, is also based on changes in mortgage interest rates. Even if one’s income doesn’t change, but interest rates go down house-buying power increases.”

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And because mortgage rates are lower than historical averages, home-buying power is up, according to Fleming.

“In fact, consumer house-buying power is 2.3 times higher than it was in 2000, almost two decades ago,” Fleming said. “It’s also only 2.9 percent below the peak in July 2016. Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power. Home buyers today have historically high levels of house-purchasing power, and that’s one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is over-stated for now.”

Most affordable states

Year over year, real home prices dropped the most in Arkansas, where they fell 2.9 percent since November 2016. Maryland came in at No. 2, with prices dropping 1.5 percent, while Washington, D.C., came in third, with a dip of 0.5 percent.

Delaware saw the biggest jump in real home prices, with an increase of 12.4 percent over the year. Nevada and Missouri both notched above-10 percent gains, while New York and Washington saw jumps of 8 percent or more.

At the metro level, San Jose, California, experienced the biggest increase in real prices (14 percent), while Pittsburgh saw the biggest drop. Real home prices in the city decreased 2.5 percent over the year.

Get today’s mortgage rates

There’s no telling how long this increased affordability will last, so take advantage now. Shop around and see what mortgage rates you qualify for today.