House Price Appreciation Resilient as Rates Rise, According to First American Real House Price Index

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


March 26, 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 January 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.

January 2018 Real House Price Index

  • 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.

Chief Economist Analysis: What If Interest Rates Doubled – the House Price Effect

“As expected, the Federal Open Market Committee increased the Federal Funds rate last week, and signaled they expect to increase rates further later this year. It’s clear we have entered the rising interest rate environment that many have been predicting for years,” said Mark Fleming, chief economist at First American. “With rising rates the new reality for the housing market, earlier this month we examined the possible impact of a dramatic increase in 30-year, fixed-rate mortgage rates on the market potential for sales. We found that even doubling the mortgage interest rate may only reduce the market potential for home sales by about 5 percent.

“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,” said Fleming.

“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,” said Fleming. “So, even in the highly unlikely scenario where mortgage rates double over the next year, house price appreciation will not be considerably impacted.”

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.,” said Fleming. “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,” said Fleming.

January 2018 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: New York (+8.7 percent), Nevada (+7.5 percent), Delaware (+6.6 percent), New Hampshire (+6.1 percent) and Kentucky (+5.5 percent).
  • The five states with the greatest year-over-year decrease in the RHPI are: Washington, D.C. (-5.5 percent), Arkansas (-4.6 percent), Maryland (-4.3 percent), New Jersey (-3.5 percent) and Wyoming (-2.5 percent).   
  • January 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. (+12.0 percent), Las Vegas (+8.8 percent), Seattle (+6.6 percent), Jacksonville, Fla. (+6.2 percent) and Nashville, Tenn. (+6.0 percent).
  • Among the CBSAs tracked by First American, the five markets with the greatest year-over-year decrease in the RHPI are: Pittsburgh (-7.8 percent), Riverside, Calif. (-3.3 percent), Memphis, Tenn. (-2.4 percent), Baltimore (-2.0 percent) and Virginia Beach, Va. (-1.8 percent).

    Next Release

    The next release of the First American Real House Price Index will take place the week of April 23, 2018 for February 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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