First American Real House Price Index

Real house prices changed

-37.9%

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

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"Changes in affordability depend on the tug-of-war between rising household income and inflation-driven pressure on 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

July 2018 Real House Price Index

How Will Rising Mortgage Rates Impact Housing Affordability in 2019?

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

  • Real house prices remained flat between June 2018 and July 2018.
  • Real house prices increased 12.2 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.9 percent between June 2018 and July 2018, and declined 3.7 percent year over year.
  • Average household income has increased 2.9 percent since July 2017 and 53 percent since January 2000.
  • Real house prices are 37.9 percent below their housing boom peak in July 2006 and 12.0 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.

The Federal Open Market Committee (FOMC) meeting is just around the corner and a rate hike is almost certain, according to experts, which will trigger conversations about rising mortgage rates across the housing industry. While changes to the federal funds rate won't necessarily spur further increases in mortgage rates, mortgage rates are expected to rise nonetheless.

Mortgages rates typically follow the same path as long-term bond yields, which are expected to increase due to inflation driven by healthy economic growth. This inflation-driven increase in long-term bond yields will, in turn, increase mortgage rates. Due in large part to the strong economy, the 30-year, fixed mortgage rate has increased 56-basis points over the past 12 months.

Five Percent Mortgage Rates Likely in 2019

graph: Changes in House-Buying Power For Different Rate Scenarios

Consensus among economists is that the 30-year, fixed mortgage rate will increase from its current rate of 4.53 percent to an average of 5 percent in 2019. Last week, we analyzed what a rate of 5.0 percent could mean for existing-home sales. The result? Home sales will continue to grow despite rising rates, due to the strength of economy. But, what will 5 percent mortgage rates mean for affordability?

The First American Real House Price Index (RHPI) measures consumer house-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage. Shifts in income 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.

If the mortgage rate increased from its current level of 4.5 percent to the expected level of 5 percent, assuming a 5 percent down payment, and the July 2018 average household income of $64,000, we find that house-buying power falls a modest 5.5 percent, from $366,000 to $346,000. In this hypothetical 5 percent mortgage rate environment, consumer-house buying power would be 11 percent lower than it was in July 2017, when the 30-year, fixed mortgage rate was 3.97 percent.

Consumer House-Buying Power Remains 2.2 Times Greater than January 2000

It's evident that rising mortgage rates have an impact on affordability. However, the root cause of higher inflation and, in turn, rising mortgage rates is surging wage growth. In fact, our estimate of average household income, based on Census and Bureau of Labor Statistics data, reached the highest level since 2000.

Average household incomes are 53 percent higher today than in January 2000. On the other hand, the 30-year, fixed mortgage rate remains near its historic low point. As a result, consumer house-buying power is still 2.2 times higher today than in January 2000. Changes in affordability depend on the tug-of-war between rising household income and inflation-driven pressure on mortgage rates.

Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.9 percent between June 2018 and July 2018, and declined 3.7 percent year over year.

While unadjusted house prices are now 2.3 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices are 37.9 percent below their housing boom peak, which was reached in July 2006.

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.