Rising Rates May Trigger More Buyers to Purchase Homes Sooner, According to First American Real House Price Index
—The fear of missing out on low rates and the potential loss of house-buying power may supercharge the housing market ahead of the spring home-buying season, says Chief Economist
Chief Economist Analysis: Nominal House Price Appreciation Sets Another Record in November
“In November, year-over-year nominal house price appreciation reached 21.5 percent, the sixth consecutive month it has set a new record. According to our Real House Price Index (RHPI) - which measures housing affordability based on changes in income, interest rates and nominal house prices - affordability declined 21.0 percent compared with a year ago, as the growth in nominal house prices combined with the 30-basis point increase in the 30-year, fixed mortgage rate vastly outpaced the 4.4 percent increase in income,” said
Federal Reserve Expected to Raise Rates Soon
“The Federal Reserve has signaled the end of the easy money era is near. In order to combat inflation, the Fed is expected to increase rates as soon as March. Mortgage rates typically follow the same path as long-term bond yields, which are expected to increase due to the Fed’s tightening of monetary policy, higher inflation expectations and an improving economy,” said Fleming. “The consensus among economists is that the 30-year, fixed mortgage rate will increase from its November rate of 3.1 percent to 3.7 percent by the end of 2022. Some forecasters predict rates will reach 4 percent, which is still historically low, but well above what buyers have grown accustomed to in recent years.”
Rising Mortgage Rates Likely to Reduce Affordability
“We can use the RHPI to model shifts in income and interest rates and see how they either increase or decrease consumer house-buying power and affordability,” said Fleming. “When mortgage rates increase, holding income constant, consumer house-buying power decreases.
“If the average mortgage rate remained at its current level of approximately 3.5 percent through the spring home-buying season, assuming a 5 percent down payment and holding average household income constant at the
“Rising mortgage rates impact affordability, but one of the root causes of rising mortgage rates is an improving economy, and an improving economy often leads to stronger wage growth. Rising household income can blunt the negative impact that higher rates have on house-buying power,” said Fleming. “In fact, our estimate of average household income increased approximately 0.6 percent on a monthly basis in
FOMO (Fear of Missing Out) or FOBO (Fear of Better Options)?
“While rates are expected to increase steadily throughout 2022, many potential home buyers may try to jump into the market now before rates rise further. The fear of missing out, or 'FOMO,' on low rates and the potential loss of house-buying power may supercharge the housing market ahead of the spring home-buying season,” said Fleming. “However, housing supply tends to increase in the spring months as more sellers list their homes for sale. While home buyers may have FOMO because of rising rates, they may not want to succumb to the fear of better options, or 'FOBO,' because there may be a better home option or options when there’s more homes for sale, even if it means they may pay more.”
-
Real house prices increased 1.5 percent between
October 2021 andNovember 2021 . -
Real house prices increased 21.0 percent between
November 2020 andNovember 2021 . -
Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.6 percent between
October 2021 andNovember 2021 , and increased 0.4 percent year over year. -
Median household income has increased 4.4 percent since
November 2020 and 68.0 percent sinceJanuary 2000 . -
Real house prices are 5.6 percent less expensive than in
January 2000 . - While unadjusted house prices are now 42.7 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 33.8 percent below their 2006 housing boom peak.
-
The five states with the greatest year-over-year increase in the RHPI are:
Arizona (+33.1 percent),South Carolina (+28.1 percent),Florida (+28.0),Georgia (+27.4 percent), andConnecticut (+26.2), - There were no states with a year-over-year decrease in the RHPI.
-
Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are:
Phoenix (+34.6 percent),Charlotte, N.C. (+34.0),Tampa, Fla. (+32.0 percent),Atlanta (+30.0 percent) andJacksonville, Fla. (+29.6 percent). - Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.
Next Release
The next release of the First American Real House Price Index will take place the week of
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.
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