Affordable Homeownership Options Are Shrinking, But Is The Housing Market Overvalued?

Housing affordability has been a challenge for many prospective buyers eager to purchase a residential property. But despite home prices that show no signs of reversing their upward movement, a prominent housing economist insists the residential market is not currently overvalued.

What Happened: Mark Fleming, chief economist at First American Financial Corporation FAF, affirmed that today’s housing market is not very accommodating to many prospective buyers on limited budgets.

“According to the Real House Price Index (RHPI), which measures housing affordability in the context of changes in consumer house-buying power, affordability in September declined to its lowest level since 2008,” said Fleming, who noted that “record nominal house price growth and rising mortgage rates outpaced the growth in household income.

“Even though household income increased 3% since September 2020 and boosted consumer house-buying power, the RHPI increased 17.5% compared with last September, the highest yearly growth rate since 2014.”

Related Link: Pending Home Sales Up 7.5% In October: Is That Good News Or Is There An Underlying Problem?

What Does This Mean: While Fleming observed that annual nominal house price growth is hovering at record levels while affordability has been in decline, this situation does not mean the housing market is overvalued.

“Historically low mortgage rates and rising incomes have allowed home buyers to borrow more, giving them the ability to bid up house prices,” he continued. “If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home.”

Fleming added homebuying power in September “was more than $170,000 above the median sale price nationally, indicating that the housing market may even be undervalued.” Still, he cautioned, real estate pricing is fixed on a local level rather than as a national trend, adding that only four of 50 markets tracked by First American showed a median sale price exceeding homebuying power — and those four markets were coastal California metro areas.

In comparison, he stated, housing markets that have a reputation for being expensive, such as Boston or Seattle, might be more affordable than some people realize.

“The reason many other expensive markets are more affordable is due to high household incomes – the more you earn, the more you pay,” Fleming said. “High household incomes in combination with historically low mortgage rates fuels strong house-buying power, which in many markets remains above the median sale price of a home.”

What Happens Next: Looking ahead, Fleming predicted that some potential buyers may temporarily retreat from the housing market over a lack of affordable options, thus forcing sellers to adjust their prices if there is a lack of buyer interest.

“Yet, as the housing market heads into the end of the year, the ongoing supply and demand imbalance will continue to put upward pressure on house price growth,” said Fleming. “It may be hard to believe but, once adjusted for consumer house-buying power, housing is undervalued in most markets and the gap between house-buying power and median sale prices indicates there remains room for continued house price growth.”

Photo: Mohamed Hassan / Pixabay