First American Real House Price Index

Real house prices changed

-38.6%

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 Index

0:48

"Rising household income contributed $11,000 to consumer house-buying power, which helped mitigate the negative effects of rising mortgage rates," 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.

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?

Real Prices - Peak to Current - San Francisco and Detroit

August 2018 Real House Price Index

How Wage Growth Reduced the Sting of Rising Rates on Affordability

The First American Real House Price Index (RHPI) showed that in August 2018:

  • Real house prices increased 0.6 percent between July 2018 and August 2018.
  • Real house prices increased 11.3 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.2 percent between July 2018 and August 2018, and declined 4.7 percent year over year.
  • Average household income has increased 3.2 percent since August 2017 and 53 percent since January 2000.
  • Real house prices are 38.6 percent below their housing boom peak in August 2006 and 13.0 percent below the level of prices in January 2000.

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.

Understanding the dynamics that influence consumer house-buying power, how much home one can buy based on changes in income and interest rates, provides helpful perspective on the housing market. When incomes rise, consumer house-buying power increases. When mortgage rates or nominal house prices rise, consumer house-buying power declines. Our Real House Price Index (RHPI) uses consumer house-buying power to adjust nominal house prices, offering insight into affordability.

For example, according to our RHPI, real house prices increased 11.3 percent year over year in August, marking a significant, but unsurprising decline in affordability. Since August 2017, two of the key factors in affordability have risen – mortgage rates increased 67-basis points and unadjusted house prices rose by 6 percent. However, household income growth helps affordability, and household incomes increased by 3.2 percent in August.

Wage Growth Soothes Sting of Rising Rates on Consumer House-Buying Power

Let’s examine how the increase in household income helped mitigate the influences of rising mortgage rates and unadjusted house prices on affordability. Rising mortgage rates, which increased from 3.9 to 4.6 percent over the last year, reduced consumer house-buying power by nearly $30,000.

That means a home buyer with a 5 percent down payment and a mortgage rate of 4.6 percent saw their house-buying power decrease from $394,000 to 364,000, since last August because of the increase in mortgage rates. But, that $30,000 decline does not factor in the change in household income since last August.

That means a home buyer with a 5 percent down payment and a mortgage rate of 4.6 percent saw their house-buying power decrease from $394,000 to 364,000, since last August because of the increase in mortgage rates. But, that $30,000 decline does not factor in the change in household income since last August.

Mortgage rates are rising because the economy is growing, the labor market is tightening, and wage growth is increasing. Wage growth translates into rising household incomes, which were 3.2 percent higher in August compared to a year ago. That growth in household income contributed $11,000 to consumer house-buying power, which helped mitigate the negative effects of rising mortgage rates. While rising mortgage rates reduced house-buying power by $30,000 over the last year, rising incomes increased consumer house-buying power by $11,000. The net effect? Overall consumer house-buying power fell by $19,000 in August compared with a year ago.

graph: The Tug of War Between Rates and Income

Historical Perspective: House-Buying Power Still Strong

While the negative effect of rising mortgage rates is outpacing the benefit of rising incomes, consumer house-buying power continues to be strong because mortgage rates remain near historic lows. Between the peak of unadjusted house prices in 2006 and August 2018, the average 30-year, fixed-rate mortgage fell from 6.8 percent to 4.6 percent. Over the same 12-year period, household income has increased 30 percent. Lower mortgage rates and higher income levels mean house-buying power is nearly 66 percent higher today than it was in 2006.

While the future of consumer house-buying power continues to rely on the tug-of-war between household income and mortgage rates, historically, home buyers still have more house-buying power today than they did over a decade ago.

Real house prices increased 0.6 percent between July 2018 and August 2018.

Real house prices increased in all metropolitan areas tracked by First American between August 2017 and August 2018.

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.

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.