Mortgage rates continued their spring surge in April, rising to the highest level in five months and helping drag affordability down by 1.5 percent compared with March, according to the First American Real House Price Index (RHPI).
On an annualized basis, affordability decreased by 9 percent. Two factors drove the year-over-year decline in affordability – a 6 percent annual increase in nominal house prices, according to the First American Data & Analytics House Price Index, and a 0.65 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago.
“A recent uptick in inventory amid a pullback in demand due to declining affordability means price appreciation nationally is cooling,” First American Chief Economist Mark Fleming said in a release. “Annual national house price growth peaked in the spring of 2022 at over 20 percent, but has since slowed to 6 percent, which is still strong by historical standards. However, house price trends vary by market, and house prices in some markets have fallen further and faster than others. Changes in house prices matter because house prices, along with mortgage rates and household income, are a key component of housing affordability.”
House prices have fallen below their respective peaks in 37 of the top 50 markets First American tracks as of April, which is five more markets than in March. The market with the greatest decline was Austin, Texas, where nominal house prices peaked in June 2022, but have since declined by 7.8 percent as the housing market rebalances. Austin was at the forefront of the U.S. housing boom, making it a leading pandemic “boomtown.” The dramatic increase in mortgage rates has had an outsized effect on markets, like Austin, that saw some of the largest pandemic price gains.
San Francisco follows closely behind, as nominal house prices have declined 5.9 percent from the recent peak in April 2022. San Francisco is an example of a market that has long been among the most expensive. When mortgage rates increased and affordability declined, house prices in already expensive markets reacted sharply to the pullback in demand.
However, while prices have declined from their respective peaks in these markets, much of the price growth that was gained during the pandemic remains. For example, in Austin, house prices increased 65 percent from February 2020 to June 2022. Similarly in San Francisco, prices increased 31 percent from February 2020 to April 2022. Even if house prices decline further, the decline would have to be substantial and persistent to erode all the equity that many homeowners have accumulated over the last few years, Fleming added.
There remain 13 markets where house prices continue to reach new heights, including traditionally more affordable markets such as: Cincinnati, Columbus, Ohio, and Detroit. Affordability is top of mind for many buyers and, while house prices continue to rise in these markets, they are still below the national average. Demand remains strong in these more affordable markets amid an ongoing shortage of supply, putting upward pressure on prices.
“Since the Federal Reserve started hiking interest rates in March 2022, house-buying power nationally has declined by 21 percent, or $94,000, while house prices are up 9 percent nationally over the same period,” said Fleming. “Affordability will likely remain a drag on the housing market until house-buying power recovers or house prices cool. A ‘higher-for-longer’ mortgage rate environment will continue to sap house-buying power and, with inventory picking up, may prolong the cooling trend for house prices. However, many potential home sellers gained quite a bit of equity over the pandemic, so price declines are unlikely to offset all of the gains.”