Homes are now more affordable — but can buyers take advantage?

Consumers' ability to afford a home purchase increased in February and that "affordability" should continue going forward — but many may not be able to take advantage of the positive conditions, a report from First American Financial said.

"Real house prices" — a rubric created by First American that measures residential property price changes adjusted for income and interest rate changes — fell 1.6% in February from January and 5.8% from February 2019. Lower real house prices translates into more affordability for potential buyers.

So, consumer house-buying power increased 2.5% month-to-month in February, and 14.6% year over year.

But the federal, state and local governments' efforts to contain the coronavirus has put a damper on what had been shaping up to be a strong spring home-buying season.

"While mortgage rates have fallen due to the current economic uncertainty, stay-at-home orders have made it more difficult for potential homebuyers to take advantage of the affordability boost, and first-time homebuyers may have an even more difficult time as lenders have tightened credit availability," First American Chief Economist Mark Fleming said in a press release. "Despite all of the headwinds, homes continue to be bought and sold, but how will the changing dynamics of supply and demand impact house prices?"

Fleming reiterated the point made in last month's Real House Price Index release that housing is much better positioned to withstand a recession than it was back in 2008 and 2009, when mortgage lenders wrote risky loans, homes were overvalued and borrowers overleveraged.

"House prices were rising before the pandemic because of a lack of supply of homes for sale, strong demand fueled by near-record low mortgage rates and the robust underlying economic fundamentals of what was the longest expansion in U.S. history until March 2020," Fleming said.

"As buyers and sellers pull back from the market and some sellers adjust their price expectations, it's reasonable to expect a reduction in home sales and a moderation in house price appreciation in this year's spring home-buying season. Yet, transactions will continue to occur. The housing market may be down, but it may be better positioned than many believe."

During February, two of the three RHPI drivers moved in favor of increased affordability in February. There was a 2.7% year-over-year increase in average household income.

Meanwhile, the average for the 30-year fixed-rate mortgage fell by 0.9 percentage points from February 2019. Those offset higher home prices.

"So, consumer house-buying power — how much one can buy based on changes in income and interest rates — continued to grow, boosting affordability and working offsetting the negative impact from rising house price appreciation," Fleming said.

There was only state with an increase in its RHPI, New Jersey, which was up 1.5%.

The five states with the largest decrease were Hawaii (down 8.7%), New Mexico (down 8.6%), Colorado (down 8.5%), California (down 8.2%) and Utah (down 8.0%).