A new report expects housing affordability to notably improve by the end of next year with income growth outgaining the average increase in home prices.
First American’s September Real House Price Index anticipates that affordability will improve by 3% on a year-over-year basis by the end of 2026.
“Affordability remains challenging, but for the first time in several years, the underlying forces are finally aligned toward gradual improvement,” First American Chief Economist Mark Fleming said in a press release Monday. “Mortgage rates may drift down only slowly, but income growth exceeding house price appreciation will provide a boost to house-buying power — even in a higher-rate world. Affordability won’t snap back overnight, but like a ship finally catching a steady tailwind, it’s now sailing in the right direction.”
September marked the seventh consecutive month of year-over-year decreases to the home price index, falling 0.1%. It also dropped 2.5% from August to September.
If a 3% improvement is realized next year, affordability would hit levels unseen since the summer of 2022, First American concluded. However, today’s home affordability is 66% lower than the prepandemic five-year average.
The assumption of improved affordability is largely reliant on expected income growth. Median expected household income growth was 2.8% in October, a 0.1 percentage-point dip from the three months prior, according to the New York Federal Reserve’s Survey of Consumer Expectations.
Despite slowing demand in the housing market due to higher mortgage rates, house prices nationally are expected to rise 1% by the end of next year, according to consensus forecasts. Supply shortages, caused by more than a decade of underbuilding and a lock-in effect that keeps homeowners in place, have put a floor under prices, First American said.
The 30-year fixed mortgage rate sits at 6.23%, declining 0.3 basis points last week after three consecutive weeks of upticks, according to Freddie Mac. Consensus estimates place the 30-year rate near 6.2% by the end of next year, and any improvements in rates will be incremental, not sweeping, First American said.
Where has affordability improved the most?
New England states saw some of the largest increases in real house prices on a year-over-year basis in September, with prices in Maine and New Hampshire each soaring at least 8%, followed by Wyoming (6.3%), North Dakota (6.2%) and Connecticut (5.5%).
The metropolitan areas with the largest rises were littered across the Midwest and Northeast, led by Cincinnati (10.3%) and Buffalo, New York (8.4%). Hartford, Connecticut, Cleveland and Milwaukee each had increases of at least 7% as well.
Florida experienced the largest improvement to housing affordability of any state with a 9.2% decrease in real house prices, boosted by 13.8% and 12.9% drops in Miami and Tampa, respectively.
Nevada (-6.2%), Texas (-3.5%) and Colorado (-3.4%) also saw significant shrinks in real house prices, while Riverside, California (-9.6%), Seattle (-8.5%) and Atlanta (-7.6%) followed the Florida cities.
