Rising Mortgage Rates May Trigger an ‘Arms’ Race for Home Buyers, According to First American Real House Price Index

—More first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year, fixed-mortgage rate, says Chief Economist Mark Fleming—

First American Financial Corporation (NYSE: FAF), a premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today released the May 2022 First American Real House Price Index (RHPI). The 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.

Chief Economist Analysis: Real House Prices Increase 50.8 percent year over year

“In May 2022, the Real House Price Index (RHPI) jumped up by 50.8 percent year over year, which is the fastest growth in the more than 30-year history of the series. This rapid annual decline in affordability was driven by a 20.1 percent annual increase in nominal house prices and a 2.3 percentage point increase in the 30-year, fixed-mortgage rate compared with one year ago,” said Mark Fleming, chief economist at First American. “For home buyers, one way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income. Even though household income increased 4.6 percent since May 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices."

“As affordability wanes, potential home buyers are looking to adjustable-rate mortgages (ARMs) for the lower rate benefit,” said Fleming. “Given the lower mortgage rate that is typically offered on an ARM today, compared with the 30-year, fixed-rate mortgage, ARMs offer prospective first-time home buyers an option to recapture some house-buying power in a rising rate environment.”

The Rise of ARMs -- It’s All About House-Buying Power

“Since the beginning of 2022, the 30-year, fixed mortgage rate has increased 1.8 percentage points. While the rates on ARMs have increased too, ARMs have lower rates than 30-year, fixed-rate mortgages,” said Fleming. “According to the Mortgage Bankers Association’s weekly survey, the average rate on the 30-year, fixed-rate mortgage was 5.45 percent in May, while the average rate on a five-year ARM was 4.46 percent."

“Consumer house-buying power, how much one can buy based on average household income and a given mortgage rate, increases when the mortgage rate drops,” said Fleming. “In fact, at those rates, an ARM increases consumer house-buying power by nearly $44,000 when compared with 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 increased. For the month of May, the average share of ARM loans was up to 9.8 percent, compared with 3.9 percent one year ago,” said Fleming. “As all mortgage rates continue to increase, the share of ARM financing will likely increase.”

Are ARMs the Answer?

“While ARMs were a symbol of the housing market crash, today’s ARMs are very different. They offer reduced risk of significant payment shock when the fixed-rate period ends and rates become adjustable,” said Fleming. “As long as the ‘spread’ between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power ‘boost’ over the 30-year, fixed-mortgage rate.”

May 2022 Real House Price Index Highlights

• Real house prices increased 3.8 percent between April 2022 and May 2022.
• Real house prices increased 50.8 percent between May 2021 and May 2022.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 2.6 percent between April 2022 and May 2022, and decreased 20.4 percent year over year.
• Median household income has increased 4.6 percent since May 2021 and 71.7 percent since January 2000.
• Real house prices are 28.7 percent more expensive than in January 2000.
• While unadjusted house prices are now 54.1 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 9.3 percent below their 2006 housing boom peak.

May 2022 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: Florida (+72.1 percent), South Carolina (+63.3 percent), Arizona (+59.1 percent), Georgia (+57.8 percent), and North Carolina (+56.6 percent).
• There were no states with a year-over-year decrease in the RHPI.

May 2022 Real House Price Local Market Highlights

• Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Tampa, Fla. (+66.7 percent), Raleigh, N.C. (+65.9 percent), Charlotte, N.C. (+65.7 percent), Miami (+63.1 percent) and Orlando (+62.9 percent).
• Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.

Next Release

The next release of the First American Real House Price Index will take place the week of August 29, 2022 for June 2022 data.

Sources

• First American Data & Analytics
• Freddie Mac
• Census Bureau

Methodology

The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.

Disclaimer

Opinions, estimates, forecasts and other views contained in 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, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2022 by First American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 130 years, innovative proprietary technologies, and unmatched 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; valuation products and services; mortgage subservicing; 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 throughout 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.

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