Affordability May Rebound in 2023, According to First American Real House Price Index

(FAF Report)

First American Financial Corporation (NYSE : FAF), a leading provider of title, settlement, and risk solutions for real-estate transactions and a leader in digital transformation, released today the October 2022 First American Real House Price Index. The RHPI measures price changes in single-family homes across the U.S., adjusted for income and interest rate changes over time. It also tracks changes in consumer house-buying power at the national, state, and metropolitan level. The RHPI adjusts to house-buying power and serves as a measure for housing affordability.

Chief Economist Analysis: Real House prices increased 8.7 percent month over month

The October 2022 Real House Price Index (RHPI), which rose by 68% annually, showed that affordability continued to decline. According to Mark Fleming (chief economist at First American), this rapid decline in affordability was caused by a 12 per cent annual increase in nominal home prices and a 3.8 percent increase in the average 30-year fixed mortgage rate, compared with one-year ago. Although household income has increased by 3.4 percent since Oct 2021, which contributed to consumer house-buying ability, it wasn't enough to offset the steep rise in mortgage rates.

Nominal house price appreciation has slowed as affordability decreases and buyers pull back from the market. Fleming stated that the national annual nominal house price increase peaked at almost 21 percent in March, but has since fallen by more than 8 percentage point to 12 percent in October. "Does the waning appreciation of house prices signal that we may have passed the worst of the affordability crisis and affordability may be poised for a rebound in 2023?"

The Economic Dynamics That Influence Affordability Going into 2023

Income Likely To Flatten: The labor market continued its impressive performance in October as rising wages led to higher household income. The annual hourly wage growth rose by 4.9 percent in October compared to a year ago. Job growth remains steady and the unemployment rate is low. The median household income increased by 3.4 percent over the past year due to wage growth. Fleming stated that the increase in household income has boosted consumer house-buying power by $16,000 compared to October 2021. The Federal Reserve is continuing to tighten its monetary policy to slow down inflation and curtail demand, but the labor market is facing increasing uncertainty. It will become increasingly difficult for Fed to combat inflation so vigorously next year without having wider impacts on employment. The labor market is still facing a shortage of labor, which causes upward pressure on wages, and therefore household income, for the moment. In 2023, the labor shortage will likely decrease. This will mean that wage growth will slow down.

Expected Stabilization of Mortgage Rates: "Mortgage rates more that doubled in October, compared to one year ago. The rise in mortgage rates, from 3.07 percent last Oct to 6.9 percent October, reduced house-buying potential by almost $178,000 while keeping income constant. Fleming said that although some of the gains were offset by increases in household income, the net effect on house buying power was approximately $162,000 less than October 2021. "Looking ahead to 2023 an average industry forecast indicates that mortgage rates will end next year at about 6 percent. Inflation is expected to recede which could provide a slight boost to consumer house-buying ability at the end 2023 than this year.

Nominal House Price Growth Continues to Slow and Decline in Some Markets. Fleming stated that the annual nominal appreciation in house prices will continue to slow down in 2023, as the housing market adjusts itself to higher mortgage rates. The average of the different industry house prices forecasts results in a 0.3 percent annual decrease in nominal house price growth in the fourth quarter 2023. As the housing market rebalances, price declines in many markets are expected to continue from recent highs in 2023. Lower house prices in 2023 than 2022 could increase affordability.

Shifting to a Buyers Market

John Naisbitt, an American author, once stated that "the best way to predict the future is to understand the present." Although economic forecasting can be difficult, understanding the current dynamics of the housing market will give you some insight into the future. Fleming stated that if mortgage rates drop to 6 percent by 2023, as the industry average predicts and household incomes stay flat due to a narrowing labor demand-supply gap and slowing labor markets, then affordability will be improved by the RHPI by 9 percent by next year, compared to October 2022. Buyers who are currently on the sidelines will welcome a more affordable housing market. Potential buyers will appreciate any improvement in the housing market next year due to the significant loss of affordability experienced by buyers this year.

Highlights of the October 2022 Real House Price Index

Between September 2022, and October 2022, real house prices grew 8.7 percent.

Between October 2021-2022, real house prices grew 68.1 percent

The consumer house-buying power (how much one can purchase based on changes to income and interest rates) decreased by 7.5 percent in September 2022 and October 20,22, and fell 33.3 percent year-over-year.

Median household income has increased by 3.4 percent and 78 per cent respectively since October 2021, respectively.

The real estate market is 49.5 percent more expensive in January 2000 than it was in January 2000.

The unadjusted price of a house is now 55.6 per cent higher than the peak housing boom in 2006. However, real house-buying power-adjusted prices are only 5.5 per cent above the peak housing boom peak in 2006.

October 2022 Real House Prices State Highlights

Five states have the highest year-over-year increases in RHPI: Florida (+86.3) Georgia (+74.4%) Alabama (+72.6%) New Hampshire (+72.1%) and Alaska (+71.9%)

The RHPI was not affected by a decrease in state incomes over the past year.

October 2022 Real House Price Highlights Local Market

First American tracks five Core Based Statistical Areas, (CBSAs), which have the highest year-over-year RHPI growth. These are Miami (+92.8%), Tampa, Fla. (+81.4%), Indianapolis (+79.4%), Jacksonville, Fla. (+77.1%), and Nashville, Tenn. (+75.9%).

First American did not find any markets that saw a decrease in RHPI year over year among the Core Based Statistical Areas.

Next Release

For November 2022 data, the next release of First American Real House Price Index is scheduled for the week of January 30-2023.

Sources

First American Data & Analytics

Freddie Mac

Census Bureau

Methodology

The methodology statement of the First American Real House Price Index can be found at URL.

Disclaimer

These opinions, forecasts, and other views are the opinions of First American's Chief Economics Officer. They do not necessarily reflect the views of First American, its management, and should not be taken to indicate First American's business prospects and expected results. While the First American Economics team tries to provide reliable and useful information, it cannot guarantee that the information is current, accurate, or appropriate for any specific purpose. You may use the information from this page with appropriate attribution.

About First American

First American Financial Corporation (NYSE : FAF) provides title, settlement and risk management solutions for real estate transactions. The company's combination of financial stability and financial strength over 130 years, as well as innovative proprietary technologies and unmatched data assets, has helped drive the digital transformation of the industry. First American also offers data products to the mortgage industry and third parties, valuation products and service; mortgage subserving; home warranty products; banking and trust management services; and other related products. The company's total revenue was $9.2 million in 2021. It offers its products and services through its agents across the United States as well as abroad. First American was named one the 100 Best Companies to Work for by Great Place to Work(r), and Fortune Magazine for the seventh year. Businesswire.com: URL

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