Consumer House-Buying Power the Story Behind Rising House Prices, According to First American Real House Price Index

Even though unadjusted house prices are higher today than ever before, consumer house-buying power remains strong, so real house prices aren’t even close to their historical peak, says Chief Economist Mark Fleming


May 24, 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 March 2018 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.

March 2018 Real House Price Index

  • Real house prices increased 1.7 percent between February 2018 and March 2018.

  • Real house prices increased 6.4 percent year over year.

  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 1.1 percent between February 2018 and March 2018, and was unchanged year over year.

  • Real house prices are 32.5 percent below their housing boom peak in July 2006 and 9.2 percent below the level of prices in January 2000.

  • Unadjusted house prices increased by 6.4 percent in March on a year-over-year basis and are 8.7 percent above the housing boom peak in 2007.

Chief Economist Analysis: Unadjusted House Prices Reach New Peak, But Consumer House-Buying Power Tells the Real Story

“As the home-buying season continues, the inventory of homes for sale remains historically low, while demand is increasing. Not surprisingly, house prices continue to rise,” said Mark Fleming, chief economist at First American. “In March, unadjusted house prices increased by 6.4 percent compared with a year ago and they are now 8.7 percent above the housing boom peak for unadjusted house prices reached in 2007. But, does that tell the real story?

“While unadjusted house prices have been on the rise since the end of 2011, nearly a seven-year run, consumer house-buying power has also increased by 14.3 percent over the same period. House-buying power, how much one can buy based on changes in income and interest rates, has benefited from a decline in mortgage rates since 2011, and the more recent slow, but steady growth of household income,” said Fleming. “Between the peak of unadjusted house prices in 2011 and today, the 30-year, fixed-rate mortgage has fallen from 5.0 percent to 4.4 percent in March. Over the same period, household income has increased 19 percent. Lower mortgage rates and higher income levels means significantly higher house-buying power today than at the end of 2011.

“When house prices are adjusted for consumer house-buying power, the real level of house prices becomes more apparent. Consumer house-buying power-adjusted house prices dropped just over 50 percent from the peak in July 2007 to the trough reached at the end of 2012,” said Fleming. “Real house prices have since increased, but today remain 32.5 percent below the 2007 peak and 9.2 percent below their level in the year 2000. Even though unadjusted house prices are higher today than ever before, consumer house-buying power remains strong, so real house prices aren’t even close to their historical peak.”

March 2018 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: Nevada (+13.2 percent), Kentucky (+12.3 percent), New York (+12.3 percent), New Hampshire (+11.8 percent) and Delaware (+11.5 percent).

  • The only state with a year-over-year decrease in the RHPI is: New Jersey (-0.7 percent).

    March 2018 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. (+19.3 percent), Las Vegas (+15.1 percent), Seattle (+12.2 percent), Jacksonville, Fla. (+11.1 percent) and Charlotte, N.C. (+10.7 percent).

  • Among the CBSAs tracked by First American, the only market with a year-over-year decrease in the RHPI is: Pittsburgh (-1.2 percent).

    Next Release

    The next release of the First American Real House Price Index will take place the week of June 18, 2018 for April 2018 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 wealth management services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com.

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