Digital Age dichotomy: How housing market can be unaffordable, undervalued at same time

First American Financial Corp. index points up trend lines that are “hard to believe”

Los Angeles /
Dec.December 08, 2021 08:30 AM
(iStock)

Despite a pandemic-fueled record growth in home prices, plunging affordability rates and at least one prominent pundit’s warnings about a possible bubble, the chief economist of a major title insurer argues the national housing market might actually be a relative bargain.

“It may be hard to believe but, once adjusted for consumer house-buying power, housing is undervalued in most markets,” Mark Fleming, the chief economist of First American Financial Corp., said via a press release that accompanies the Santa Ana-based firm’s most recent Real House Price Index.

American Financial Corp.’s Real House Price Index measures the price changes of single family houses throughout the country, adjusted for consumers’ “house-buying power,” which is determined by incomes and interest rates.

According to the index, in September housing affordability reached its lowest level since 2008, just prior to the housing bubble bust and onset of the Great Recession.

The index found that unadjusted house prices had surged by about 21 percent over the 12 months ended in September, the most recent period fully analyzed for the monthly index.

Incomes rose by 3 percent on average over the same period, accounting for most of the decline in affordability, with a slight uptick in the average 30-year, fixed mortgage rate a secondary factor.

Overall, those figures meant the firm’s Real House Price Index–which considers the gap between incomes and prices–increased 17.5 percent in September from a year earlier. It was the largest year-over-year increase since 2014.

Yet First American’s Fleming nevertheless predicts prices will continue to rise, thanks to some consumers’ strong house-buying power and continued tight inventory.

“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,” the analyst said.

Frenzy meets disparities

The seeming contradiction of historically low affordability rates and plenty of runway for higher prices is a head-scratching demonstration of what happens when a pandemic touches off a market frenzy amid a growing trend of income disparity.

These dynamics seem to be true in different dimensions, though, with affordability representing a street-level phenomenon and the undervalued market a creature of spreadsheets.

The key to explaining the dichotomy is understanding how a bulging higher end of the socio-economic scale can spur demand that pushes prices past the point of affordability for most would-be homebuyers — and how that can carry on well after the bulk of the market is left behind.

Uneven effects


First American’s Real Housing Price Index counts housing prices, interest rates and household incomes as primary considerations, but its findings also appear to reflect other factors of the marketplace, including the pandemic’s varied effects on segments of the overall economy and wages.

Some companies did better during the pandemic, particularly digitally driven enterprises well suited to a world locked down and shut in.

Others fared worse, especially service providers such as hotels, movie theaters and restaurants, which count on live crowds for revenue.

There’s a similar split when it comes to household income. That seems to be a big part of Fleming’s conclusion that a dip in affordability and a market with room for more price hikes are both true these days.

The data indicates that consumers as a whole currently have a lot of house-buying power on account of historically low interest rates and rising incomes.

“If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home,” Fleming added.

That is generally the case in the U.S., according to the index.

“In September, house-buying power was more than $170,000 above the median sale price nationally, indicating that the housing market may even be undervalued. Of course, real estate is local, but even at the market level, consumer house-buying power exceeds the median home price in most markets.”

The only markets that bucked that data are on the California coast: In Los Angeles, San Francisco, San Diego and San Jose median home prices ran ahead of house-buying power. In the remaining 46 markets the index measured, the higher buying power indicated space for the sellers’ market to continue even as overall affordability sinks.

Party like it’s 2006?

The big picture comes as a composite, though, with select buyers whose wages are rising at healthy clips chasing relatively few properties.

The contradiction between those relatively few well-heeled buyers and the larger numbers of would-be homeowners who can’t afford to buy into the market points back to the pandemic, which appears to have exacerbated a national trend of income disparity. The housing market holds a mirror up to a market that looks to be running on a trend of the rich getting richer, the poor losing traction, and the middle class getting hollowed out as manufacturing yields to the Digital Age and its chasm between employment in high-end fields such as software development and lower-end jobs in the service sector.

First American also drew a historical analogy: Even with the pandemic-driven price surge, national home prices remain more than a third lower, in adjusted terms, than they were in 2006, at the peak of the housing boom.

That peak came about two years before the crash.

Reason enough to head into 2022 with one eye on 2024.





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