Rising mortgage rates could trigger an ‘arms race’ for home buyers, according to the first US house price index
SANTA ANA, Calif.–(BUSINESS WIRE)–First American financial company (NYSE: FAF), a leading provider of securities, settlement and risk management solutions for real estate transactions and the leader in the digital transformation of its industry, today released the first U.S. Real House Price Index (RHPI) from May 2022. The RHPI measures the price changes of single-family properties across the United States adjusted for the impact of changes in income and interest rates on consumer purchasing power over time at national levels , state and metropolitan. Since the HRPI takes into account the purchasing power of a home, it also serves as a measure of housing affordability.
Chief Economist Analysis: Real Home Prices Rise 50.8% Year Over Year
“In May 2022, the Real House Price Index (RHPI) jumped 50.8% year-over-year, representing the fastest growth in the company’s more than 30-year history. This rapid annual decline in affordability was driven by a 20.1% annual increase in nominal house prices and a 2.3 percentage point increase in the 30-year fixed mortgage rate from a year ago. one year,” said Mark Fleming, chief economist at First American. “For homebuyers, one way to mitigate the loss of affordability caused by a higher mortgage rate is to increase household income equivalent, if not better.Even though household income has increased by 4.6% since May 2021 and has boosted consumer purchasing power, this has not been enough to offset the loss in affordability due to rising prices. mortgage rates and rapidly rising nominal prices.
“As affordability declines, potential home buyers are turning to adjustable rate mortgages (ARMs) for a lower rate,” Fleming said. “Given the lower mortgage rate that is typically offered on an ARM today, compared to the 30-year fixed rate mortgage, ARMs offer potential first-time home buyers an option to recoup some of the purchasing power of a home in a rising interest rate environment. ”
The rise of ARMs – It all depends on the purchasing power of a house
“Since the start of 2022, the 30-year fixed mortgage rate has increased by 1.8 percentage points. Although ARM rates have also increased, ARMs have lower rates than 30-year fixed rate mortgages,” Fleming said. “According to the Mortgage Bankers Association weekly survey, the average rate on a 30-year fixed-rate mortgage was 5.45% in May, while the average rate on a five-year ARM was 4. 46%.”
“The purchasing power of a house, that is, the amount one can buy given the average household income and a given mortgage rate, increases when the mortgage rate falls” , said Fleming. “In fact, at these rates, an ARM increases the purchasing power of a home by almost $44,000 compared to 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 risen. For the month of May, the average share of ARM loans reached 9.8%, compared to 3.9% a year ago,” Fleming said. “As all mortgage rates continue to rise, the share of ARM financing will likely increase.”
Are MRAs the answer?
“While ARMs were a symbol of the housing market crash, today’s ARMs are very different. They offer reduced risk of a large payment shock when the fixed rate period ends and rates become adjustable” “As long as the ‘spread’ between ARMs and fixed-rate mortgages continues, more first-time homebuyers will choose ARMs, as the lower mortgage rate gives them a ‘boost.’ inch” in purchasing power compared to the 30-year fixed mortgage rate.”
Highlights of the May 2022 Real House Price Index
Real house prices increased by 3.8% between April 2022 and May 2022.
Real house prices increased by 50.8% between May 2021 and May 2022.
Consumer purchasing power, the amount one can buy based on changes in income and interest rates, decreased by 2.6% between April 2022 and May 2022, and by 20.4 % year over year.
Median household income has increased by 4.6% since May 2021 and by 71.7% since January 2000.
Real house prices are 28.7% more expensive than in January 2000.
While unadjusted house prices are now 54.1% above the peak of the housing boom in 2006, real house prices adjusted for purchasing power remain 9.3% below the peak of the housing boom in 2006 .
Highlights of the state of real house prices in May 2022
The five states with the the biggest Year after year increase in the HRPI are: Florida (+72.1%), South Carolina (+63.3%), Arizona (+59.1%), Georgia (+57.8%) and North Carolina (+56.6%).
There were no states with a year on year lessen in the RHPI.
May 2022 Actual Home Prices Local Market Highlights
Of the Basic Statistical Domains (CBSAs) tracked by First American, the five markets with the the biggest Year after year increase in the HRPI are: Tampa, Florida (+66.7%), Raleigh, NC (+65.9%), Charlotte, NC (+65.7%), Miami (+63.1%) ) and Orlando (+62.9%).
Of the Basic Statistical Domains (CBSAs) tracked by First American, there were no markets with year-over-year variation. lessen in the RHPI.
The next release of the First American Real House Price Index will be the week of August 29, 2022 for June 2022 data.
The methodological statement of the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
The opinions, estimates, forecasts and other views contained on 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 and useful information, it does not warrant that the information is accurate, current, or fit for any particular purpose. © 2022 by First American. Information on this page may be used with proper attribution.
About First American
First American financial company (NYSE: FAF) is a leading provider of securities, settlement and risk management solutions for real estate transactions. With its financial strength and stability built over more than 130 years, innovative proprietary technologies and unparalleled 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; assessment products and services; mortgage service; 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 in 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.