by Mark Fleming, Chief Economist, First American Corporation

Is Affordability Worse Than the 2006 Housing Boom Peak?

In the first report with 2022 data, the Real House Price Index (RHPI) jumped up by nearly 27 percent, the fastest growth in the RHPI since 2004. This rapid annual decline in affordability was driven by a 21.7 percent annual increase in nominal house prices and a 0.7 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago. Even though household income increased 5 percent since January 2021, it was not enough to offset the negative impact on consumer house-buying power from higher rates and fast rising nominal prices.

“Homes are less affordable than they were a year ago, but nationally and in most markets they remain much more affordable than at the peak of the 2006 housing boom.”

In the near term, affordability is likely to wane further nationally as rising mortgage rates and increasing house prices continue to outpace gains in household income. However, it’s helpful to put affordability in historical context.

Homes More Affordable Today Than 2006 Housing Peak

Nationally, real, house-buying power-adjusted house prices remain 29 percent below the peak in April 2006. While consumer house-buying power declined in January 2022, it remains near record levels and more than double the level of consumer house-buying power in April 2006 thanks to higher household income and significantly lower mortgage rates. Household incomes today are nearly 48 percent greater than April 2006 and the average mortgage rate is over 3 percentage points below its April 2006 level. In fact, real house prices nationally are at the same level they were in 2000. But real estate is local, and the recovery from the housing boom and crash varies by market, so where has affordability improved the most compared with the prior peak?

All 50 Markets in the RHPI are More Affordable than Previous Housing Boom Peak

For nominal house prices, all 50 markets we track in the RHPI have surpassed their previous housing price peaks. Yet, nominal house prices don’t tell the whole affordability story. 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. House-buying power matters because people buy homes based on how much it costs each month to make a mortgage payment, not the price of the home. Mortgage rates are generally the same across the country, so the long-run decline in mortgage rates boosts affordability equally in each market. Household income growth and nominal house prices, on the other hand, differ from market to market, so affordability varies geographically as well.

According to our house-buying power-adjusted RHPI, homes are 34 percent more affordable on average across all 50 markets than their respective RHPI peaks. While the supply-demand imbalance in today’s housing market continues to fuel strong house price appreciation across the country, the dramatic increase in house-buying power relative to 2006 driven by lower mortgage rates and higher incomes has more than made up for it. In fact, in four cities homes are more than 50 percent more affordable today than at their prior RHPI peak.