First American Real House Price Index

Real house prices changed

-39.7%

since the pre-recession peak

The First American Real House Price Index (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 and across the United States at the national, state and metropolitan area level. Because the RHPI adjusts for house-buying power, it is also a measure of housing affordability.

"Rising household incomes and falling mortgage rates are currently boosting consumer house-buying power in many major metropolitan markets, offsetting any nominal gains in price levels," says Chief Economist Mark Fleming

What makes it a Real House Price Index?

House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country.

Why does the RHPI tell a different story than other house price measures?

Changing incomes and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases. Traditional measures of house price affordability are dependent on the assumption of specific loan terms (down payment, LTV, DTI) and the choice of income level (i.e. median or average household income). The RHPI is not dependent on any of these assumptions and so it more broadly reflects the real price experienced by consumers regardless of their income level or the loan terms specific to their situation.

3 Key Drivers

The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.

What do the RHPI number values mean?

The RHPI is set to equal 100 in January 2000. So, a state with an RHPI value of 110 in 2016 has seen real house prices increase 10 percent since 2000.

What does the RHPI reveal at a market level?

Let's consider San Francisco and Detroit and look at the RHPI for each.

Since the peak of the housing crisis in 2006, many metropolitan areas have experienced large drops in unadjusted house price levels followed by, in some cases, impressive gains. However, when measuring metropolitan house price appreciation using our consumer house-buying power adjusted Real House Price Indices, the story looks very different. For example, San Francisco and Detroit both experienced similar real price declines, about 60 percent over the course of three years, and very little "recovery" has occurred in real prices. The common perception is that San Francisco, the shining example of the new economy, and Detroit, the tarnished example of the old economy, couldn't be more different cities when it comes to housing costs. Yet, after adjusting for income growth and mortgage rates and their influence on house-buying power, real house prices in both cities remain well below the pre-recession peak. So, really how different are these two markets?

Real Prices - Peak to Current - San Francisco and Detroit

May 2016 Real House Price Index

Real House Prices Remain 39.7 Percent
Below The Housing Boom Peak

The First American Real House Price Index (RHPI) was unchanged in May 2016 as compared with April 2016 and increased 0.4 percent as compared with May 2015. Unadjusted house prices are expected to increase by 5.0 percent in April on a year-over-year basis. After adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom. Real house prices are 39.7 percent below their housing-boom peak in July 2006 and 19 percent below the level of prices in January 2000. Unadjusted, the national price level is 3.0 percent away from the housing-boom peak in 2007.

The RHPI is available below as an interactive tool that can be used to look up and compare real house prices at the state and metropolitan area levels, and also offers additional perspective on income and interest rate changes.

Era of Uncertainty Continues to Drive Consumer House-Buying Power

Demand for U.S. Treasury bonds remains at a record high as both domestic and foreign investors, still reeling from the outcome of the Brexit vote and grappling with greater global economic uncertainty, search for safety. This is compounded by negative yields on government bonds in Germany, Japan, Switzerland, and elsewhere, which make even the record low yields on U.S. treasuries attractive by comparison. The low yields on U.S. treasuries have kept mortgage rates marching downwards with the 30-year, fixed-rate mortgage remaining under 4.0 percent since July 2015. The housing market has benefitted with the low rates fueling increases in consumer house-buying power and keeping real house prices low by historic standards.

Rates in Decline

"The yield on the 10-year Treasury note hit record lows on the back of the 'Brexit' vote, uncertainty around the future of the European Union, and economic concerns in China," said Mark Fleming, chief economist at First American. "In the short term, the global economic turmoil is paradoxically having a positive impact on housing affordability and the health of the housing market in the form of almost historically low mortgage rates."

Affordability in Many Major Markets Continues to Improve in May

Real house prices declined on a month-over-month basis in 15 of the 43 metropolitan areas tracked by First American.

Real house prices declined on a month-over-month basis in 15 of the 43 metropolitan areas tracked by First American, as increases in consumer house-buying power were sufficient to more than offset unadjusted price appreciation. San Francisco, Washington, D.C, and Boston led the pack in terms of real house price declines and improved affordability, each experiencing month-over-month declines of roughly 1 percent. Counter to the conventional wisdom that housing is becoming less affordable in these markets, many consumers that were house hunting benefitted from an improvement in affordability in May.

While a lack of inventory is still problematic, the improvements in affordability, caused by a combination of low mortgage rates and job growth are helping the market reach its potential for home sales. A rise in estimated median household incomes is also playing a large role in certain key markets that from a nominal standpoint seem expensive. For example, the increases in estimated median household incomes in both Dallas and San Francisco were enough to offset unadjusted price gains and bring meaningful affordability improvements in real terms to both markets.

"Rising household incomes and falling mortgage rates are currently boosting consumer house-buying power in many major metropolitan markets, offsetting any nominal gains in price levels," said Fleming. "Improving affordability for consumers is a direct result of increased demand for long-term U.S. Treasury bonds due to overall uncertainty surrounding the future of global markets."

About the First American
Real House Price Index

First American's proprietary Real House Price Index (RHPI) is a weighted repeat-sales house price index that measures the price movements of single-family residential properties by time and across geographies, adjusted for the influence of income and interest rate changes on consumer house-buying power. The index is set to equal 100 in January 2000. Changing incomes and interest rates either increase or decrease consumer house-buying power. When incomes rise and mortgage rates fall, consumer house-buying power increases, acting as a deflator of increases in the unadjusted house price level. For example, if the unadjusted house price index increases by three percent, but the combination of rising incomes and falling mortgage rates increase consumer buying power over the same time period by two percent, then the Real House Price index only increases by 1 percent. The Real House Price Index reflects changes in house prices, but also accounts for changes in consumer house-buying power.

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. © 2016 by First American. Information from this page may be used with proper attribution.