Nonmetro Homeownership Affordability in Decline

In recent years, home price growth exceeded household income growth nationally and in the Fifth District. Paired with rising interest rates over the past two years, this has considerably reduced affordability of homes on the market for the typical household.

We tend to associate high-priced housing with metropolitan areas, such as the Charlotte, North Carolina, metropolitan statistical area (MSA) where year-over-year price growth for existing single-family homes reached a peak of 27 percent in the second quarter of last year. But we have also seen accelerated home price growth in nonmetropolitan areas recently, which has contributed to worsening homeownership affordability for families looking to purchase homes in these communities.

Nonmetropolitan Home Price Growth in the Fifth District

Compared to data available for densely populated metropolitan areas, nonmetropolitan home price data are relatively hard to obtain. As an alternative to direct price data, the Federal Housing Finance Agency's (FHFA) House Price Index (HPI) provides insight into how nonmetropolitan home prices, aggregated to the state level, have changed over time. It measures quarterly changes in existing single-family house prices by looking at repeat home sale and refinancing mortgages that have been purchased or securitized by Fannie Mae or Freddie Mac.

Since 2015, sales prices for existing homes in nonmetropolitan parts of each Fifth District state have usually increased from one quarter to the next. North Carolina and South Carolina saw the greatest increases over this time (86 percent and 77 percent, respectively), whereas West Virginia's price increases were the most modest (41 percent).

Nonmetropolitan home prices saw the most dramatic year-over-year increases between late 2020 and mid-2022, similar to overall state-level trends that include both metropolitan and nonmetropolitan areas. In particular, the second quarter of 2022 saw the greatest year-over-year prices increases in each state, ranging from 16 percent in nonmetropolitan West Virginia to 26 percent in nonmetropolitan North Carolina.

Nonmetropolitan Income Growth Versus Home Price Growth

How does household income growth compare?

Unfortunately, household income data are available on more of a lag than FHFA HPI data. The most recent median household income estimates from the U.S. Census Bureau's American Community Survey (ACS) are for 2021. Also, because some nonmetropolitan counties have small population sizes, the Census Bureau is only able to publish median household income estimates using pooled data across five sample years because one-year sample sizes are not large enough for these counties. For these reasons, we can observe changes in median household income for nonmetropolitan parts of Fifth District states at three points in time (to avoid comparing estimates based on overlapping sample years): 2011, 2016, and 2021.

Between 2011 and 2016, the differences between changes in home prices and median household income were small — between 1 and 4 percentage points — in nonmetropolitan areas of each Fifth District state. Home prices and median household income not only grew more rapidly between 2016 and 2021, but also home price growth consistently exceeded median household income growth. The differences were greatest in North and South Carolina, where home prices increased by 13 percentage points more than household incomes. By contrast, West Virginia's home prices increased by only 1 percentage point more than household incomes.

However, it's important to put these measures and how they relate to one another in perspective. Nonmetropolitan FHFA HPI data are aggregated to the state level, masking variation in home price growth between nonmetropolitan counties within the state. In the Fifth District, nonmetropolitan communities are diverse. The local housing market and income characteristics help determine how widely accessible homeownership is in a specific place. Locations with more homes for sale and greater variation in sales prices provide greater opportunities for homebuyers across a larger portion of the income spectrum.

Rising Interest Rates and Nonmetropolitan Homeownership Affordability

At face value, home prices increasing more rapidly than median household income means that households earning the median income will have a more difficult time finding a home that fits their budget. Rising interest rates amplify this difficulty because homebuyers will need to reduce their target home price in order to meet the same mortgage payment target.

To illustrate how interest rates play into affordability, consider a first-time homebuyer earning the 2021 nonmetropolitan median household income for Virginia ($51,629). For the homebuyer's monthly mortgage payment to be considered affordable, it would need to remain at or below 30 percent of their income, which would be $1,291. If the homebuyer has enough for a 15 percent downpayment, would they have been able to purchase the typical home and keep their mortgage payment below 30 percent of their income?

In 2021, the median home sales price for nonmetropolitan Virginia was about $237,620, according to data from Redfin. At the average 30-year fixed-rate mortgage that year, which was still near historic lows at 2.96 percent, the homebuyer's monthly payment (including principal, interest, private mortgage insurance, property insurance, and property taxes) would be $1,996 — about 55 percent over what would be considered affordable. To buy a house at the same price using the most recent monthly average 30-year fixed-rate mortgage of 6.71 percent, the monthly mortgage payment would rise to $2,453, or 90 percent more than the homebuyer could reasonably afford.

Conclusion

In line with recent national and state trends, home prices in nonmetropolitan parts of the Fifth District have been growing at a faster pace than household incomes. Last year saw the largest year-over-year home price increases in nonmetropolitan parts of the Fifth District in the past decade, suggesting that home prices moved even farther out of reach for prospective homebuyers. And although the housing market is cooling with home price growth moderating considerably this year, elevated interest rates continue to make home affordability a challenge.

Exploring trends in mortgage rates, household income, and home prices in nonmetropolitan areas suggest what homebuying might be like for the typical homebuyer. But just as the housing markets are diverse across nonmetropolitan communities in the Fifth District, so too are the characteristics of households living in them. Future posts will explore how household characteristics compare for renters and owners in nonmetropolitan areas, how the share of income that households spend on housing varies by those characteristics, and what we can learn about residents' well-being from housing quality indicators.