In today’s Real Estate Podcast, from The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi compare the dynamics of today’s challenging housing market with the housing market crash of the mid-to-late 2000s and the housing market of the early 1980s.
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More first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year, fixed-mortgage rate, says Chief Economist Mark Fleming
Santa Ana, CA – July 22, 2022 (BUSINESS WIRE) First American Financial Corporation (NYSE: FAF),a premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today released the May 2022 First American Real House Price Index (RHPI). 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 house-buying power over time at national, state and metropolitan area levels.Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
“According to the Mortgage Bankers Association’s weekly survey, the average rate on the 30-year, fixed-rate mortgage was 5.45 percent in May, while the average rate on a five-year ARM was 4.46 percent.” Tweet this
Chief Economist Analysis: Real House Prices Increase 50.8 percent year over year
“In May 2022, the Real House Price Index (RHPI) jumped up by 50.8 percent year over year, which is the fastest growth in the more than 30-year history of the series. This rapid annual decline in affordability was driven by a 20.1 percent annual increase in nominal house prices and a 2.3 percentage point increase in the 30-year, fixed-mortgage rate compared with one year ago,” said Mark Fleming, chief economist at First American. “For home buyers, one way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income. Even though household income increased 4.6 percent since May 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices.”
“As affordability wanes, potential home buyers are looking to adjustable-rate mortgages (ARMs) for the lower rate benefit,” said Fleming. “Given the lower mortgage rate that is typically offered on an ARM today, compared with the 30-year, fixed-rate mortgage, ARMs offer prospective first-time home buyers an option to recapture some house-buying power in a rising rate environment.”
The Rise of ARMs — It’s All About House-Buying Power
“Since the beginning of 2022, the 30-year, fixed mortgage rate has increased 1.8 percentage points. While the rates on ARMs have increased too, ARMs have lower rates than 30-year, fixed-rate mortgages,” said Fleming. “According to the Mortgage Bankers Association’s weekly survey, the average rate on the 30-year, fixed-rate mortgage was 5.45 percent in May, while the average rate on a five-year ARM was 4.46 percent.”
“Consumer house-buying power, how much one can buy based on average household income and a given mortgage rate, increases when the mortgage rate drops,” said Fleming. “In fact, at those rates, an ARM increases consumer house-buying power by nearly $44,000 when compared with a traditional 30-year, fixed-rate mortgage. This could be a game-changer for many first-time home buyers.”
“Because ARMs offer a lower mortgage rate, there has been a steady increase in the share of ARM loans as mortgage rates have increased. For the month of May, the average share of ARM loans was up to 9.8 percent, compared with 3.9 percent one year ago,” said Fleming. “As all mortgage rates continue to increase, the share of ARM financing will likely increase.”
Are ARMs the Answer?
“While ARMs were a symbol of the housing market crash, today’s ARMs are very different. They offer reduced risk of significant payment shock when the fixed-rate period ends and rates become adjustable,” said Fleming. “As long as the ‘spread’ between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year, fixed-mortgage rate.”
May 2022 Real House Price Index Highlights
May 2022 Real House Price State Highlights
May 2022 Real House Price Local Market Highlights
Next Release
The next release of the First American Real House Price Index will take place the week of August 29, 2022 for June 2022 data.
Sources
Methodology
The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
Disclaimer
Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2022 by First American. Information from this page may be used with proper attribution.
About First American
First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $9.2 billion in 2021, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2022, First American was named one of the 100 Best Companies to Work For by Great Place to Work® and Fortune Magazine for the seventh consecutive year. More information about the company can be found at www.firstam.com.
Media Contact:
Marcus Ginnaty
Corporate Communications
First American Financial Corporation
(714) 250-3298
Investor Contact:
Craig Barberio
Investor Relations
First American Financial Corporation
(714) 250-5214
—The challenge for home buyers in 2022 will mirror 2020 and 2021 – you can’t buy what’s not for sale, even if you can afford to, says Chief Economist Mark Fleming—
Santa Ana, CA – December 27, 2021 (BUSINESS WIRE)–First American Financial Corporation (NYSE: FAF),a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the October 2021 First American Real House Price Index (RHPI). 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 house-buying power over time at national, state and metropolitan area levels.Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
“Affordability sank to its lowest level since 2008 in October, as two of the three key drivers of the Real House Price Index (RHPI) swung in favor of reduced affordability relative to one year ago. Higher mortgage rates and record year-over-year nominal house price growth triggered a nearly 20 percent jump in the RHPI (rising RHPI values indicate declining affordability),” said Mark Fleming, chief economist at First American. “The soaring nominal house prices and uptick in mortgage rates swamped any affordability gains from the 3.6 percent yearly increase in household income. Since we know real estate is local, house-buying power and nominal house price gains vary by city, begging the question, where is affordability declining the most?”
“In October, mortgage rates increased 0.2 percentage points relative to one year ago, which reduces affordability, all else held equal. Higher mortgage rates decrease affordability equally in each market as mortgage rates are generally similar across the country”Tweet this
Chief Economist Analysis: Real House Prices Increased 19.6 Percent Year Over Year
The Five Cities Where Affordability Declined the Most
“Affordability declined year over year in all of the markets we track,” said Fleming. “The five markets with the greatest year-over-year decline in affordability were:
1.) Phoenix (+33.7 percent),
2.) Charlotte, N.C. (+32.3 percent),
3.) Tampa, Fla. (+30.9 percent),
4.) Jacksonville, Fla. (+29.3 percent),
5.) Memphis, Tenn. (+27.5 percent).
“In October, mortgage rates increased 0.2 percentage points relative to one year ago, which reduces affordability, all else held equal. Higher mortgage rates decrease affordability equally in each market as mortgage rates are generally similar across the country,” said Fleming. “However, household income growth and nominal house prices vary by market, creating the market-level variance in affordability. Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from higher household income.
“Phoenix suffered the greatest year-over-year loss in affordability in October, mostly due to the nearly 34 percent annual increase in nominal house price growth. Robust investor activity and strong net-in migration to Phoenix has fueled soaring demand for homes against a limited supply of homes for sale,” said Fleming. “In Charlotte, N.C., household income declined modestly, meaning all three key drivers of the RHPI dragged affordability down in October relative to one year ago. The importance of household income becomes apparent when comparing the decline in affordability in Charlotte to Tampa. While annual nominal house price appreciation in Tampa outpaced that of Charlotte, rising household income tempered the decline in affordability. Ultimately, nominal house price appreciation overwhelmed any affordability lift from house-buying power in all three of these markets.”
How Will Affordability Impact the Housing Market in 2022?
“If affordability falls too far, some home buyers on the margin will pull back, prompting fewer bidding wars and causing house prices to moderate. In the near term, a labor market characterized by high demand, but limited supply means upward pressure on wages as employers compete to attract employees. While mortgage rates are expected to increase in 2022 as the economic recovery continues, consensus expectations still put them below 4 percent,” said Fleming. “For some home buyers, as the ‘big short’ in housing supply continues, it will become impossible to keep up with double-digit nominal house price growth, especially in a rising-rate environment. The challenge for home buyers in 2022 will mirror 2020 and 2021 – you can’t buy what’s not for sale even if you can afford to.”
October 2021 Real House Price Index Highlights
October 2021 Real House Price State Highlights
October 2021 Real House Price Local Market Highlights
Next Release
The next release of the First American Real House Price Index will take place the week of January 24, 2022 for November 2021 data.
Sources
Methodology
The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
Disclaimer
Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2021 by First American. Information from this page may be used with proper attribution.
About First American
First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $7.1 billion in 2020, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2021, First American was named to the Fortune 100 Best Companies to Work For® list for the sixth consecutive year. More information about the company can be found at www.firstam.com.
Media Contact:
Marcus Ginnaty
Corporate Communications
First American Financial Corporation
(714) 250-3298
Investor Contact:
Craig Barberio
Investor Relations
First American Financial Corporation
(714) 250-5214