First American Real House Price Index
Real house prices changed-37.1%
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 Index0:48
"On the one hand, rising mortgage rates reduce the affordability of housing but, on the other hand, rates are increasing because wages are rising faster than expected," 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.
Median Household Income is one of the fundamental factors determining the amount of housing a particular consumer can afford. incomes can be tracked over time to demonstrate how rising/falling incomes impact consumer house-buying power.
Interest rates drive how much a home buyer can leverage their median household income to purchase more or less housing. As interest rates fall, consumers are able to purchase a more expensive house due to lower borrowing costs. The opposite is true for rising rates.
House price levels are measured using a weighted repeat-sales house price index that tracks how prices of single-family residential properties rise and fall over time and across numerous geographies.
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?
December 2017 Real House Price Index
How Wage Growth Both Helps and Hurts Housing Affordability
The First American Real House Price Index (RHPI) showed that in December 2017:
- Real house prices increased 0.4 percent between November and December 2017.
- Real house prices increased 0.4 percent year over year.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.1 percent between November and December 2017, and grew 5.6 percent year over year.
- Real house prices are 37.1 percent below their housing boom peak in July 2006 and 15.5 percent below the level of prices in January 2000.
- Unadjusted house prices increased by 6.0 percent in December on a year-over-year basis and are 6.9 percent above the housing boom peak in 2007.
more expensive than they were a year ago
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.
Earlier this month, the Bureau of Labor Statistics reported that average hourly earnings increased in January by 2.9 percent compared with a year ago. This was a big splash of economic news that had ripple effects on the housing market, as the 2.9 percent increase in wages surpassed expectations.
Rising wages mean home buyers can borrow more. In other words, consumer house-buying power — how much one can buy based on changes in income and interest rates — is growing, which is a boon to the housing market.
However, the larger than expected increase in wage growth set off a chain reaction. It increased concerns among investors that inflation will rise and the Federal Reserve will increase rates at a faster pace than previously expected. Consequently, the 30-year, fixed-rate mortgage rate increased to 4.4 percent last week. The consensus among economists is that 30-year, fixed-rate mortgage rates will approach 5 percent by the end of the year. Rising interest rates increase borrowing costs for home buyers, thereby decreasing consumer house-buying power.
So, on the one hand, rising mortgage rates reduce the affordability of housing, as the cost of borrowing increases. But, on the other hand, rates are increasing because wages are rising faster than expected. Wage growth simultaneously helped and hurt housing affordability.
However, rising household income has largely offset the increase in borrowing costs brought about by higher interest rates in the past year. In December, consumer house-buying power was up 5.6 percent compared with a year before, even though mortgage rates increased in 2017.
Household income varies substantially by housing market, so comparing house-buying power with house prices by market can provide perspective on housing affordability. In the figure below, home buyers in markets below the line have house-buying power that is greater than the average house price in their market — houses are relatively more affordable in these markets. Home buyers in markets above the line have house-buying power that is less than the average house price in their market — houses are relatively less affordable in these markets.
It's no surprise that house prices exceed house-buying power in markets like San Francisco, New York and Los Angeles. Yet, housing markets generally considered expensive, like Washington, D.C., Boston and Denver, are actually more affordable than many believe. The fact is most of the markets we monitor in our Real House Price Index (RHPI) have more than enough house-buying power when compared to the average house prices in the market.
It's important to remember that rising mortgage rates are often the result of positive economic conditions, like rising incomes and strong economic performance. In 2018, home buyers may have to take the good, wage growth, with the bad, rising mortgage rates.
States with the greatest year-over-year increase in RHPI
- Delaware (+7.3%)
- Nevada (+7.0%)
- New York (+6.6%)
- New Hampshire (+5.8%)
- Michigan (+4.2%)
Real House Price
States with the greatest year-over-year decrease in RHPI
- Arkansas (-5.3%)
- Maryland (-5.1%)
- Washington, DC (-3.7%)
- New Jersey (-3.2%)
- Wyoming (-2.9%)
Markets among the largest 50 Core Based Statistical Areas (CBSAs) with the greatest year-over-year increase in RHPI
- San Jose, CA (+9.8%)
- Las Vegas (+9.1%)
- Columbus, OH (+8.8%)
- Seattle (+5.8%)
- Philadelphia (+15.7%)
Real House Price
Local Market Highlights
Markets among the largest 50 Core Based Statistical Areas (CBSAs) with the greatest year-over-year decrease in RHPI
- Pittsburgh (-7.3%)
- Riverside, CA (-3.3%)
- Dallas (-2.9%)
- Memphis, TN (-1.6%)
- Cincinnati (-1.5%)
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 really 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 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.
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.
The next release of the First American Real House Price Index will be posted on the week of March 26, 2018.