After years of affordability challenges for buyers in the U.S., the housing market is “finally starting to listen,” according to Fortune 500 financial services firm First American.
High mortgage rates and home prices sidelined homebuyers for years, especially in the aftermath of the pandemic housing market that saw sub-3% mortgage rates and more affordable home prices. But ever since then, mortgage rates spiked, peaking at 8% in late 2023.
Now that mortgage rates are trending slightly lower during the past few months—currently hovering around 6.5%—some buyers have at least a little bit of breathing room. Meanwhile, home price growth is mostly flat or slightly declining due to decreasing demand and increasing supply, according to the National Association of Home Builders.
“For prospective buyers who have been waiting on the sidelines, the housing market is finally starting to listen,” wrote chief economist Mark Fleming in an Aug. 29 First American post.
Fleming’s analysis is based on First American’s Real House Price Index (RHPI), which stands out because it accounts for inflation unlike other home-price indexes. That’s because “just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago,” according to First American.
While a glance at most other home-price indexes would show a stark increase in home prices, First American’s actually shows national housing affordability rose 3.1% year-over-year in June, marking the fifth consecutive month with an annual gain.
However, if one were to look at something like the Case-Shiller Home Price Index, it would show home prices are nearly 50% higher than they were five years ago.
The RHPI also differs from other pricing indexes because it measures consumer buying power over time (taking into account the impact of income and interest-rate changes over time), while other indices like Case-Shiller track home value changes over time.
Is housing really becoming more affordable?
There are some promising signs housing affordability is improving: mortgage rates are slightly declining, home-price growth is slowing, and household incomes are somewhat increasing, according to First American. That’s led housing affordability to the best point it’s been since September 2024, First American’s analysis shows.
Home prices either declined or grew less than 1% annually in more than half of major U.S. metros, and income outpaced home-price appreciation in about 70% of markets, according to First American. Austin, Texas, saw the sharpest decline at 13% from its June 2022 peak and San Francisco at 10% down from its April 2022 peak.
“While sellers may feel the pinch of waning pricing power, slower price growth—paired with rising incomes—is finally giving buyers a much-needed edge,” Fleming wrote.
Still, housing affordability, as measured by RHPI, remains more than 70% higher (worse) than the pre-pandemic five-year average.
Indeed, another analysis published by Redfin on Wednesday shows the U.S. homeowner population actually stopped growing for the first time in nearly a decade because mortgage rates and home prices still feel out of reach, even if they’re considered to be slightly improving.
“America’s homeowner population is no longer growing because rising home prices, high mortgage rates and economic uncertainty have made it increasingly difficult to own a home,” wrote Chen Zhao, Redfin’s head of economics research. “People are also getting married and starting families later, which means they’re buying homes later—another factor that may be at play.”
But even a slight rebound can still be considered “an encouraging sign” for potential buyers, Fleming wrote. It’s going to be a more gradual and uneven leveling process for the U.S. housing market, Fleming wrote, “but the momentum is turning.” It’ll take more income growth, continued slowing of home price appreciation, and a drop in mortgage rates. Other economists have said the mortgage rate drop it would take to make housing feel affordable in the U.S. again is “unrealistic,” and in some metros even a 0% mortgage rate wouldn’t fix housing affordability.
“While this process will take time, likely years, the balance of power is no longer as one-sided as it was during the pandemic frenzy,” Fleming wrote.
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