First American Real House Price Index
Real house prices changed-36.9%
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
"If house prices rise, but house-buying power rises further, are homes less affordable?" asks 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?
May 2018 Real House Price Index
House Prices Continue to Rise, but House-Buying Power Still Near Historic Highs, According to First American Real House Price Index
The First American Real House Price Index (RHPI) showed that in May 2018:
- Real house prices increased 1.5 percent between April 2018 and May 2018.
- Real house prices increased 11.4 percent year over year.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 1.0 percent between April 2018 and May 2018, and declined 3.6 percent year over year.
- Real house prices are 36.9 percent below their housing boom peak in July 2006 and 11.0 percent below the level of prices in January 2000.
- Unadjusted house prices increased by 7.3 percent in May on a year-over-year basis and are 0.8 percent above the housing boom peak in 2006.
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.
The Bad News: Affordability Declined Year-Over-Year
In May 2018, all three of the RHPI components increased compared with the year before. The 30-year, fixed mortgage rate increased by 0.6 percent, and the unadjusted house price index increased by 7.3 percent. Household income, which contributes positively to housing affordability, also increased 3.2 percent since May 2017. The result when you factor in all three influences — an 11.4 percent increase in the Real House Price Index nationally and an increase in the RHPI in all markets compared with a year ago.
The Good News: Consumer House-Buying Power is Up 23.6 percent since 2011
Unadjusted house prices are 0.8 percent above the housing market peak in 2006, and have been increasing since the end of 2011, nearly a seven-year run. However, consumer house-buying power has also increased by 55 percent since the housing boom peak in 2006 — that's 69 times the increase in unadjusted house prices. House-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage rate, has benefited from a declining rate environment, and slow, but steady household income growth. Nationally, since the start of the nearly seven-year run of increasing unadjusted house prices in 2011, house-buying power has increased 23.6 percent.
Top Five Cities for House-Buying Power
But real estate is local and house-buying power differs between cities. Using a city's annual median household income, assuming that a household spends one-third of their income on a mortgage, and considering the current 30-year, fixed-rate mortgage rate, the five cities with the greatest consumer house-buying power in May 2018 are:
- San Jose, CA: $660,884
- Washington, DC: $633,093
- San Francisco, CA: $583,496
- Boston, MA: $509,520
- Seattle, WA: $486,574
House-Buying Power Outpaces Unadjusted House Price Growth
Unsurprisingly, the top five cities coincide with the five cities with the highest household income — make more (money) to buy more (house). These cities also boast higher than national average household income growth — 4.9 percent from May 2017 to May 2018. Since the housing market peak in 2006, household income has increased, on average, 44.5 percent for these cities and the 30-year, fixed-rate mortgage rate has fallen from 6.3 percent to 4.6 percent. As a result, average house-buying power across these five cities has increased 74.7 percent since the housing market peak, considerably outpacing the 22.5 percent growth in unadjusted house prices. If house prices rise, but house-buying power rises further, are homes less affordable?
When house prices are adjusted for consumer house-buying power, the "real" level of house prices becomes more apparent. Nationally, real, consumer house-buying power-adjusted house prices (RHPI) today remain 36.9 percent below their peak, and 11.0 percent below their level in the year 2000. Across the five markets with the highest house-buying power, real, consumer house-buying power-adjusted house prices (RHPI) today remain 31.3 percent below the housing market peak, but are 8.2 percent above their level in the year 2000. Why are house prices in these coastal markets so much higher than the national level? Because home buyers have the income to afford them.
Consumer house-buying power declined by 3.6 percent year over year, mainly due to a 54-basis point change in interest rates over the course of the past 12 months.
States with the greatest year-over-year increase in RHPI
- Nevada (+18.8%)
- New Hampshire (+17.2%)
- New York (+17.0%)
- Delaware (+16.5%)
- Ohio (+16.2%)
Real House Price
No state had a year-over-year decrease in RHPI in May
Markets among the largest 50 Core Based Statistical Areas (CBSAs) with the greatest year-over-year increase in RHPI
- San Jose, CA (+25.6%)
- Cleveland (+22.6%)
- Las Vegas (+22.2%)
- Jacksonville, FL (+17.4%)
- Columbus, OH (+17.1%)
Real House Price
Local Market Highlights
No market among the largest 50 Core Based Statistical Areas (CBSAs) had a year-over-year decrease in RHPI in May
While unadjusted house prices are now 0.8 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices are 36.9 percent below their housing boom peak, which was reached in July 2006.
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.
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 August 27, 2018 for June 2018 data.