Powerful Market Forces Reduce Affordability, According to First American Real House Price Index

The supply squeeze and rising mortgage rates are powerful forces working against housing affordability, but homeowners are gaining equity and the economy remains strong, says Chief Economist Mark Fleming


April 23, 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 February 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.

February 2018 Real House Price Index

  • Real house prices increased 2.9 percent between January 2018 and February 2018.
  • Real house prices increased 5.1 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 2.6 percent between January 2018 and February 2018, and increased 0.8 percent year over year.
  • Real house prices are 33.7 percent below their housing boom peak in July 2006 and 10.9 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 5.9 percent in February on a year-over-year basis and are 8.0 percent above the housing boom peak in 2007.

Chief Economist Analysis: Supply Squeeze and Rising Rates Impact Affordability

“Last week, the average 30-year, fixed-rate mortgage rose 5 basis points to 4.46 percent, reaching its highest level since January of 2014. The consensus among economists is that the 30-year, fixed-rate mortgage will approach 5 percent by the end of this year. All else held equal, this will make housing more expensive,” said Mark Fleming, chief economist at First American. “However, some perspective is important. The historical average for the 30-year, fixed-rate mortgage is about 8 percent so, even with the expected increase, mortgage rates will still be low by historical standards.

“The primary reason mortgage rates are rising is a healthy and growing economy. Income levels are growing in many markets, which helps offset rising interest rates. Nationally, house-buying power, how much one can buy based on changes in income and interest rates, has increased by 0.8 percent in the past year,” said Fleming. “However, some markets have seen faster income growth and subsequently greater increases in house-buying power – Riverside, Calif. (+4.5 percent), San Francisco (+3.5 percent), and Providence, Rhode Island (+2.8 percent) led the nation.

“So, if house-buying power has increased, meaning consumers can afford to purchase more home, why is affordability declining as illustrated by increases in our Real House Price Index of 2.9 percent month over month and over 5 percent since last year? Two words: supply squeeze,” said Fleming.

The Supply Squeeze is On

Two dynamics are restricting housing supply this spring, namely an increasing number of homeowners are rate-locked, and the prisoner’s dilemma facing homeowners. The supply squeeze is already impacting the market. Existing-home sales, which account for roughly 90 percent of U.S. home sales, declined 1.3 percent in February compared with a year ago. The market is underperforming its potential by an estimated 300,000 seasonally adjusted annualized rate of sales,” said Fleming. “The risk of selling one’s home in a market with a shortage of inventory keeps existing homeowners from selling, preventing more supply from entering the market. This increases competition for homes and puts pressure on prices. Not surprisingly, unadjusted house prices increased 5.9 percent in February compared with a year ago.”

Relief on the Horizon?

“The supply squeeze and rising mortgage rates are powerful forces working against housing affordability, but homeowners are gaining equity and the economy remains strong. Millennial demand for homeownership is growing and builders remain confident, demonstrated by the number of homes under construction reaching its highest point in more than a decade in February,” said Fleming. “The conditions driving the supply squeeze, upward pressure on prices and consequently lower affordability are likely to continue through 2018. However, some relief may be on the horizon, as more homes are on the way and income gains are offsetting rising interest rates. That’s good for the housing market.”

February 2018 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: Nevada (+11.7 percent), New York (+11.3 percent), Kentucky (+10.5 percent), New Hampshire (+10.5 percent) and Missouri (+10.2 percent).
  • The five states with the greatest year-over-year decrease in the RHPI are: Washington, D.C. (-1.7 percent), Maryland (-1.1 percent), New Jersey (-0.9 percent), Vermont (+0.0 percent) and Arkansas (+0.0 percent).   

    February 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. (+17.8 percent), Las Vegas (+12.9 percent), Seattle (+11.1 percent), Charlotte, N.C. (+10.2 percent) and Nashville, Tenn. (+10.1 percent).
  • Among the CBSAs tracked by First American, the only market with a year-over-year decrease in the RHPI is: Pittsburgh (-3.4 percent).

    Next Release

    The next release of the First American Real House Price Index will take place the week of May 21, 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.

###

myFirstAm®

Access the powerful online services available only at First American.

Sign In
Forgot Username or Password?

Sign Up

Sign up for a myFirstAm® account.

Other Platforms

  • myFirstAm®

    Track orders, calculate fees, and set milestone alerts.

  • FASTWeb

    Title ordering, routing and tracking.

  • AgentNet®

    eJackets, closing protection letters, back title, bulletins and more.

  • DataTree.com

    Access the nation's largest land record database.

  • Home Warranty

    Coverage for a home's major systems and appliances.