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Housing affordability dipped in March: First American

Elevated mortgage rates and home prices are hampering buyer purchasing power

Housing affordability dipped in March on both a monthly and yearly basis, according to a new report by First American

Affordability fell by 0.1% compared with February, according to the First American Real House Price Index (RHPI). On an annualized basis, affordability fell by approximately 5%. Meanwhile, mortgage rates also rose over the course of the month.

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 homebuying  power over time at the national, state and metro-area levels. 

“Two factors drove the year-over-year decline in affordability – a 6.2% annual increase in nominal house prices, and a 0.3 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago,” Mark Fleming, First American chief economist, said in a statement. 

“For home buyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income,” Fleming said. “Even though household income increased 3.7% since March 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices.”

Consumer homebuying power, which represents how much one can buy based on changes in income and mortgage rates, decreased 0.1% between February and March 2024 but increased 0.8% year over year. The median household income has increased 3.7% since March 2023 and 90.2% since January 2000.

West Virginia, New Mexico, New Jersey, Massachusetts and Indiana posted the largest year-over-year increases in the RHPI. Meanwhile, Washington, D.C., and Colorado posted year-over-year decreases. 

Among the metros tracked by First American, Memphis, Tennessee; Boston; Providence, Rhode Island; Buffalo, New York; and Cincinnati posted the highest year-over-year gains in the RHPI. Meanwhile, Denver and Portland, Oregon, posted year-over-year losses. 

In March, the housing market was almost overvalued at a national level, but a surprisingly large number of markets remain significantly undervalued, according to First American.

Among the top 50 markets tracked, 22 were overvalued in March, meaning that the median existing-home sale price exceeded home purchasing power. 

The market with the highest overvaluation was San Jose. There, the median consumer home purchasing power in March was $723,000, significantly below the median sale price of $1,430,000.

“In markets considered overvalued, the chronic housing supply shortage is preventing prices from adjusting downward enough to reflect the affordability reality,” Fleming said. “Additionally, house prices are ‘downside sticky.’ Home sellers would rather withdraw from the market than sell at lower prices.”

“The good news is that most of the markets we track remain undervalued by this measure, and nine markets were undervalued by $100,000 or more,” Fleming added. “Detroit, Philadelphia, and Cleveland are markets considered undervalued by an average of $145,000.”

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