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Home prices more affordable than the 2006 housing peak

by Liz Hughes

Housing affordability has changed across all 50 top markets, proving to be more affordable than it was during the previous housing peak, according to First American Financial’s latest Real House Price Index

Chief economist Mark Fleming said record-breaking increases in home prices are outpacing house-buying power. In July, year-over-year nominal house price appreciation hit a record 20%, outpacing house-buying power increases compared to last year. 

The Real House Price Index (RHPI) measures affordability in the context of changes in consumer house-buying power, incorporating changes in household income, mortgage rates and nominal house prices,” Fleming said. “House-buying power, how much one can buy based on changes in income and interest rates, increased by 3.8% in July compared with one year ago, propelled by lower mortgage rates and higher household income.”

While affordability declined in July, Fleming said it’s important to note that nationally, nominal house prices in July were 35% higher than in 2006, yet “real, house-buying power-adjusted house prices remain nearly 38% below their 2006 housing boom peak.” 

Baltimore (58%), Washington (57%), Chicago (56%), Miami (56%) and Riverside, Calif (54%) were the top five markets where affordability improved the most since 2006, according to the report.

The five markets where affordability improved the least were Nashville, Tenn. (13%), Buffalo, N.Y. (13%), Kansas City, Mo. (19%), Denver (20%) and Salt Lake City (24%). 

Home prices proved to be more affordable than during the previous housing peak in all 50 top markets, according to the report. While 45 markets surpassed their peaks by at least 10%, five only had modest affordability growth — Chicago (2%), Baltimore (3%), Washington, D.C. (4%), Virginia Beach, Va. (8%) and Hartford, Conn. (9%). 

But that’s just part of the story, according to Fleming. 

“While nominal house prices have increased, house-buying power has also increased because of a long-run decline in mortgage rates and the slow, but steady growth of household income,” he said. “House-buying power matters because people typically buy homes based on how much it costs each month to make a mortgage payment, not the price of the home,” said Fleming. 

He added that the decline in mortgage rates is boosting affordability in all markets, while household income and nominal house prices differ market to market, which has affordability varying geographically as well. 

“While nominal house prices continue to break records, affordability remains vastly improved in most markets relative to their previous peaks,” said Fleming. “The pace of house price appreciation is widely expected to cool but still increase in the months ahead. If prices continue to outpace house-buying power, affordability will suffer, but we’re still a long way from 2006.”

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