Some Housing Markets Are Cruising For a Fall

The upward race of housing prices and mortgage rates has continued to push down affordability, according to First American Financial Corporation. That has resulted in a jump in the number of markets where houses are overvalued and, as long CRE history would suggest, potentially up for a price fall.

In its Real House Price Index, or RHPI, First American measured single-family house price changes across the country, “adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels.”

According to the company, as nominal house prices were up 16.7% year over year and 30-year fixed mortgage rates another 2.5 percentage points higher, housing affordability continued an ongoing swift decline.

“The RHPI reflects the decline in affordability, as it jumped up by nearly 54 percent on an annual basis,” the release quoted Mark Fleming, chief economist at First American, as saying. “For home buyers, there are few options to mitigate the loss of affordability caused by a higher mortgage rate and rising prices.”

That’s pushed more people to remain in the rental market, which has helped exacerbate demand with insufficient supply and pushed rental rates upward, making that form of housing less accessible as well.

The combination of higher land costs, zoning regulations, construction supply chain issues, growing prices of materials and components, and insufficient skilled labor have helped keep supply of new rental housing—multifamily, single-family rentals, and build-to-rent—restricted.

Two other results have happened. One is that would-be buyers pulling back has reduced demand in the house market. “Annual house price growth peaked in March at nearly 21 percent but has since decelerated to a still-high 16.7 percent in July,” said Fleming. “As the housing slowdown continues, the pace of house price moderation will vary market to market, with prices decelerating faster in some markets than in others.” Before the pandemic, average house price growth was below 4%.

Most of the 50 markets that First American tracks are still undervalued, meaning that median home price was below their definition of consumer house-buying power. In some markets—Detroit, Philadelphia, and Pittsburgh—the gap was $200,000.

But a growing number of markets have become overvalued, in which median home price was higher than consumer house-buying power. In July 2021, only four markets were considered overvalued, which means. As of July 2022, there were 15 such markets, which run the risk of seeing rapid price deceleration.

“The median consumer house-buying power in San Jose in July was just over $770,000, barely more than half of the median sale price of a home at $1,460,000,” Fleming said. “Consequently, annual house price growth is adjusting in San Jose. Price growth peaked at 19.4 percent in February 2022, but has since decelerated quickly to 4.6 percent in July – the second fastest deceleration in prices among all the top 50 markets we track, just after Sacramento.”

The firm’s measurements were taken with respect to a 5.4% 30-year mortgage rate. Move that up to September’s 6% and there are four additional overvalued markets.

“Nationally, while month-over-month house prices may decline, annual house price declines are not expected, given the ongoing supply-demand imbalance and continued strength in the labor market,” said Fleming.