Affordability Crisis Over-Stated, According to First American Real House Price Index

Home buyers today have historically high levels of house-purchasing power and that’s one important reason why the talk of an affordability crisis is over-stated for now, says Chief Economist Mark Fleming


January 29, 2018, Santa Ana, Calif.

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the November 2017 First American Real House Price Index (RHPI). The 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 at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

November 2017 Real House Price Index

  • Real house prices increased 0.5 percent between October and November 2017.
  • Real house prices increased 5.0 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, was unchanged between October and November 2017, and grew 0.9 percent year over year.
  • Real house prices are 37.7 percent below their housing boom peak in July 2006 and 16.2 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 6.0 percent in November on a year-over-year basis and are 6.3 percent above the housing boom peak in 2007.

Chief Economist Analysis: The Affordability Crisis That Isn’t

“That nominal house prices are growing faster than household incomes is often used as the basis for arguing that we are facing an affordability crisis. It is true that unadjusted house prices grew faster than income between November 2016 and November 2017,” said Mark Fleming, chief economist at First American. “Our Real House Price Index (RHPI) showed that unadjusted house prices increased by 6.0 percent in November on a year-over-year basis and are 6.3 percent above the housing boom peak in 2007. Over the same 12-month period, household incomes have increased by significantly less, 2.8 percent.

“Yet, overlooked in the comparison of income growth and unadjusted house price growth is that a change in household income is not the only factor that influences how much home one can afford to buy. A consumer’s house-buying power, how much one can afford to buy, is also based on changes in mortgage interest rates,” said Fleming. “Even if one’s income doesn’t change, but interest rates go down, house-buying power increases. Consumer house-buying power, based on changes in income and interest rates, was unchanged between October and November and actually improved by 1 percent, compared with a year ago.

“In fact, consumer house-buying power is 2.3 times higher than it was in 2000, almost two decades ago. It’s also only 2.9 percent below the peak in July 2016. Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power,” said Fleming. “Home buyers today have historically high levels of house-purchasing power and that’s one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is over-stated for now.”

November 2017 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: Delaware (+12.4 percent), Nevada (+10.7 percent), Missouri (+10.6 percent), New York (+8.6 percent) and Washington (+8.3 percent).
  • The five states with the smallest year-over-year increase in the RHPI are: Arkansas (-2.9 percent), Maryland (-1.5 percent), Washington, D.C. (-0.5 percent), Alabama (+0.5 percent) and Oklahoma (+1.3 percent).   

    November 2017 Real House Price Local Market Highlights

  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: San Jose, Calif. (+14.0 percent), Las Vegas (+13.6 percent), Seattle (+10.7 percent), Columbus, Ohio (+10.2 percent) and Jacksonville, Fla. (+10.1 percent).
  • Among the CBSAs tracked by First American, the five markets with the smallest year-over-year increase in the RHPI are: Pittsburgh (-2.5 percent), Austin, Texas (+1.3 percent), Riverside, Calif. (+1.5 percent), Memphis, Tenn. (+2.6 percent) and Cincinnati. (+2.8 percent).

    Next Release

    The next release of the First American Real House Price Index will take place the week of February 26, 2018 for December 2017 data.

    Methodology

    The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.

    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.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With total revenue of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

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