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8 Journal MARKETS CONSIDERED OVERVALUED INCREASING AS MORTGAGE RATES RISE First American Financial Corporation, a provider of title, settlement, and risk solutions for real estate transactions, released the July 2022 First American Real House Price Index (RHPI). e 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. July 2022 Real House Price Index Highlights » Real house prices decreased 0.9% between June 2022 and July 2022. » Real house prices increased 53.8% between July 2021 and July 2022. » Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 1.7% between June 2022 and July 2022, and decreased 24.1% year-over-year. » Median household income has increased 3.0% since July 2021 and 76% since January 2000. » Real house prices are 28.7% more expensive than in January 2000. » While unadjusted house prices are now 55.1% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 9.3% below their 2006 housing boom peak. Chief Economist Analysis: Real House Prices Increase 53.8% Year-Over-Year "Housing affordability continued its rapid annual decline in July 2022, as nominal house prices increased 16.7% year over year and the 30-year, fixed mortgage rate increased 2.5 percentage points compared with a year ago. e RHPI reflects the decline in affordability, as it jumped up by nearly 54% on an annual basis," said Mark Fleming, Chief Economist at First American. "For home buyers, there are few options to mitigate the loss of affordability caused by a higher mortgage rate and rising prices. One way to offset the decline in affordability is with an equivalent, if not greater, increase in household income. Another option is choosing an adjustable-rate mortgage (ARM), which typically has a lower rate than a 30-year, fixed-rate mortgage. Even though higher household income and ARMs help to increase consumer house-buying power, they're not enough to offset the affordability loss from higher rates and fast-rising nominal prices in July. "As affordability wanes, would-be buyers are pulling back from the market, prompting annual house price appreciation to moderate. Annual house price growth peaked in March at nearly 21% but has since decelerated to a still-high 16.7% in July," said Fleming. "As the housing slowdown continues, the pace of house price moderation will vary market to market, with prices decelerating faster in some markets than in others. By analyzing which markets are considered overvalued, we can identify the markets at risk of more rapid price deceleration." Where Is Housing Overvalued? "If housing is appropriately valued, house- buying power should equal or exceed the median sale price of a home," said Fleming. "As of July, most of the top 50 markets we track remain undervalued by this measure, some significantly undervalued. For example, Detroit, Philadelphia, and Pittsburgh are markets considered undervalued by nearly $200,000. "However, real estate is local and not all markets are created equal. ere were 15 markets considered overvalued in July, meaning the median existing-home sale price exceeded house-buying power. One year ago, only four markets were considered overvalued," said Fleming. "San Jose, California was the most overvalued market. e median consumer house-buying power in San Jose in July was just over $770,000, barely more than half of the median sale price of a home at $1,460,000. Consequently, annual house price growth is adjusting in San Jose. Price growth peaked at 19.4 percent in February 2022 but has since decelerated quickly to 4.6% in July—the second fastest deceleration in prices among all the top 50 markets we track, just after Sacramento. "Overvaluation was calculated based on July 2022 house prices and mortgage rates, but mortgage rates have drifted higher since then. If we hold household income and median sale prices constant at their July 2022 levels, the increase in the average 30-year, fixed mortgage rate from 5.4% in July to 6% in September, increases the number of overvalued markets by four, adding San Antonio; Miami; Tampa, Florida; and Salt Lake City to the list and bringing to the total to 19," said Fleming.