Jumping Price Gains for Entry-Level Homes Are Reducing Affordability

Housing market outlook remains positive due to strong demand, but rapid price appreciation and slower household growth lowers Nationwide index.

A recent Nationwide Health of Housing Markets Report (HoHM Report) found that entry-level homebuyers could be the most affected by growing affordability concerns as unsustainable price gains are more severe for homes in the lowest price tier. 

According to analysis from Nationwide, the average price of a lowest-tier home nationally has increased by 56 percent over the last five years. By comparison, the value of a home in the highest tier has increased by 33 percent over the same period. 

“The U.S. housing market is, overall, healthy and maintains a positive outlook,” said David Berson, Nationwide senior vice president and chief economist. “However, we can’t ignore that price gains are weighing on affordability, and it’s worth keeping an eye on how the price environment will impact those looking to purchase a home for the first time.” 

The market experienced similar price gaps between the lowest- and highest-tiers in both 1987 and 2005. House price growth slowed significantly in subsequent years in each case. 

Berson, however, does not see the same warning signs in 2017. 

“The lending environment today is very different than in both those times. Lenders are more cautious today, likely because they have changed lending practices since the housing market crash. Consumers are in more solid financial standing today, too, as they are less levered overall.” 

Reno, Nevada at 73.7 percent has the highest price-gain spread in the U.S. over the past five years between a lowest- and highest-tier home. 

Notable price-gain spreads between the lowest- and highest-tier homes in the largest MSAs in the U.S. are: Riverside-San Bernardino, California (48.2 percent); Phoenix-Mesa-Scottsdale, Arizona (47.9 percent); Denver (46.9 percent); Atlanta (42.5 percent); Tampa-St. Petersburg, Florida (39.0 percent); Los Angeles (28.4 percent); Minneapolis (28.2 percent); San Diego (26.5 percent); Dallas (25.8 percent); and Chicago (24.7 percent). 

Despite concerns about housing affordability and an unexpected slowdown in household formation, Nationwide’s forward-looking barometer of the U.S. housing market health found that the outlook remains positive due to homebuyer demand. 

“Demand continues to be the primary driver of today’s market expansion,” said Berson. “While affordability is a growing concern, we don’t see a demand slowdown as inventory turnover continues apace and new home building lags household growth.” 

Three of the top-performing metro areas are in Oklahoma. The 10 top metro areas in the index are, in order: Lawton, Oklahoma; Philadelphia, Pennsylvania; Springfield, Illinois.; Tulsa, Oklahoma.; Morgantown, West Virginia.; Sumter, South Carolina.; Akron, Ohio; Oklahoma City, Oklahoma.; Waterloo-Cedar Falls, Iowa; and Gadsden, Alabama.

Half of the bottom 10 MSAs are in Texas. In order, the bottom 10 are: Anchorage, Alaska; Victoria, Texas; Waco, Texas; Rapid City, South Dakota.; Dallas-Plano-Irving, Texas; Bismarck, North Dakota.; San Angelo, Texas; Houma-Thibodaux, Louisiana.; New Orleans-Metairie, Louisiana.; and Fort Worth-Arlington, Texas. 

More information about the HoHM Report, including the methodology used, can be found at blog.nationwide.com/housing.

The HoHM Report is released on a quarterly basis online and in print.