US Housing Affordability Sinks to Lowest Level Since 2008

Housing prices have been rising steadily throughout the pandemic in what many analysts dubbed the new housing bubble. According to the First American Financial Corporation‘s First American Real House Price Index (RHPI) for October 2021, housing affordability sank to its lowest levels since 2008, as mortgage rates and housing prices spiked while housing inventory remained down.

The RPHI is a metric used to measure price changes for single-family homes in the US, adjusted for the impact of income and interest rate changes on house-buying power over time at national, state, and metropolitan levels. Due to RHPI’s function as a measurement of buying power, it can be used to assess house affordability in the market as well.

Looking at November this year, prices for newly-built houses have increased by almost 19% compared to last year, while existing home prices shot up by over 13%. Besides soaring house prices, the jump in mortgage rates, which increased by 0.2% in October, also severely impaired consumer buying power. Mortgage rate increases are tied to another huge problem American consumers are now facing - inflation. 

The Fed hiked up mortgage prices to curb inflation, which still remains high. Another, perhaps even more noticeable effect of high inflation is that consumers need to spend significantly more money on goods and services, which naturally puts a strain on people’s finances. 

As a result of these circumstances, the RHPI increased by twenty percent across the US, which translates to a 20% reduced affordability. Mark Fleming, the chief economist at First American, singled out five cities where affordability tanked the most:

Phoenix, AZ (33.7%)

Charlotte, NC (32.3%)

Tampa, FL (30.9%)

Jacksonville, FL (29.3%)

Memphis, TN (27.5%)

As one can expect, reduced affordability has led to a sharp drop in house sales. In November 2021, house sales were down 14% compared to 2020. One factor that should have led to a decrease in house prices (and hence boosted sales) is the increased inventory of new houses on the market. 

However, existing housing inventory remains low - only a third of the level in the new housing market, with only a 2-month supply currently available. Apart from a very limited supply of homes, the rising costs of building materials - especially timber - also keep the house prices up.

While analysts believe that a significant price correction is due as a result of the drop in house purchases, the future of the housing market remains uncertain. The fact that affordability dropped to the lowest levels since 2008 when global markets crashed due to the housing bubble bursting, doesn’t inspire confidence among consumers.

Now, regular people seem more concerned with keeping the homes they own safe and under warranty than buying new ones under the inflated prices, so it will be a while until the buyers’ market picks up again.