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First American: Quantitative un-easing to further affordability constraints

Supply levels decreased affordability in July

Affordability decreased in July as low levels of housing inventory pushed home prices up, and the housing market should prepare for further affordability drops in the future, First American Financial Corp., a provider of title insurance, settlement services and risk solutions for real estate transactions, said in a new report.

While low housing supply could continue to decrease affordability, the latest First American Real House Price Index points out there is another factor that could bring affordability down in the coming months – quantitative un-easing.

“Last week, the FOMC announced that it will begin to reduce its large portfolio of bonds, which is likely to push mortgage rates higher in the coming months,” First American Chief Economist Mark Fleming said. “This quantitative un-easing will further impact affordability.”

While some experts agree that this move could create rising interest rates, other experts predicted that due to it being well telegraphed, the quantitative un-easing process will have little effect on interest rates.

First American's report noted that in July, real home prices increased 0.6% from the month before, and a full 10.4% from July 2016.

The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time and across the United States at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

Unadjusted home prices increased 5.8% annually in June, and now rest 3.4% above the housing boom peak in 2007, according to the index.

“Rising rates and rapid price appreciation driven by the lack of supply caused affordability to decline in July,” Fleming said.

“Based on our RHPI, affordability has declined by more than 10% over the last year. But, the loss in affordability is only significant to potential first-time buyers,” Fleming added. Existing homeowners with fixed-rate mortgages benefited from the rising prices with increased equity. You’re perspective on rising home prices and affordability largely depends on whether you are a homeowner or not.”

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