First American Real House Price Index

Real house prices changed

-35.8%

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.

Mark Explains the Real House Price Index

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"Even in the highly unlikely scenario where mortgage rates double over the next year, house price appreciation will not be considerably impacted," 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

January 2018 Real House Price Index

Will Rising Mortgage Rates Hurt House Prices?

The First American Real House Price Index (RHPI) showed that in January 2018:

  • Real house prices increased 2.3 percent between December 2017 and January 2018.
  • Real house prices increased 2.3 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 1.5 percent between December 2017 and January 2018, but increased by 3.7 percent year over year.
  • Real house prices are 35.8 percent below their housing boom peak in July 2006 and 13.8 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 6.0 percent in January on a year-over-year basis and are 7.8 percent above 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.

What if Interest Rates Doubled — the House Price Effect

In our extreme hypothetical scenario, where 30-year, fixed-rate mortgage rates doubled, the market potential for home sales was not significantly impacted, but how might house prices react? In addition to forecasting potential home sales based on a dramatic change in the mortgage interest rate, from 4.4 percent to approximately 9 percent, we can forecast what may happen to house prices based on the same interest rate adjustment.

Unadjusted, nominal, house prices increased 6.0 percent in January compared with a year ago, according to our estimate in our Real House Price Index report. Under our hypothetical scenario where mortgage rates double over the next year, our analysis indicates that nominal house price growth would increase above 7 percent as the spring home-buying market heats up, and slow down to 5.8 percent by the beginning of 2019. So, even in the highly unlikely scenario where mortgage rates double over the next year, house price appreciation will not be considerably impacted.

Chart: Forecast of Home Price Growth and the 30-Year Fixed Rate Mortgage

Consumer House-Buying Power Offsets Rising Mortgage Rates

This month's RHPI report indicates that, even though mortgage rates increased in 2017, consumer house-buying power – how much one can buy based on changes in income and interest rates – actually improved by 3.7 percent in January compared with a year ago. Household income growth has been strong enough to offset higher mortgage rates. As a result of stronger consumer house-buying power, real house prices only increased by 2.3 percent in January compared with a year ago.

As we look ahead, it's reasonable to expect borrowing costs to increase as mortgage rates rise, in turn reducing consumer house-buying power, which reduces affordability. The good news is that, even in the unlikely case that mortgage rates rise faster than expected, our housing market is well positioned to adapt.

About the First American
Real House Price Index

The traditional perspective on house prices is fixated on the actual prices and the changes in those prices, which overlooks what matters to potential buyers - their purchasing power, or how much they can afford to buy. First American's proprietary Real House Price Index (RHPI) adjusts prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow.

The RHPI uses 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 house price level. For example, if the house price index increases by three percent, but the combination of rising incomes and falling mortgage rates increase consumer buying power over the same 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. © 2018 by First American. Information from this page may be used with proper attribution.