First American Real House Price Index

Real house prices changed

-37.0%

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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“Without stronger household income growth, rising mortgage rates will continue to impede consumer house-buying power, reducing affordability,” 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

September 2018 Real House Price Index

Why is Real House Price Appreciation Accelerating?

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

  • Real house prices increased 2.0 percent between August 2018 and September 2018.
  • Real house prices increased 15.3 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.9 percent between August 2018 and September 2018, and declined 6.7 percent year over year.
  • Average household income has increased 2.9 percent since September 2017 and 53 percent since January 2000.
  • Real house prices are 37.0 percent below their housing boom peak in August 2006 and 11.0 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.

In September, all three of the key drivers of the Real House Price Index (RHPI), household income, mortgage rates, and an unadjusted house price index, increased compared with a year ago. When household income rises, consumer house-buying power increases. When mortgage rates and house prices increase, consumer house-buying power decreases. The 30-year, fixed-rate mortgage and the unadjusted house price index increased by 0.8 and 7.5 percent respectively. Even though household income increased 2.9 percent since September 2017 and boosted consumer house-buying power, the Real House Price Index increased 15.3 percent compared to last September, the highest yearly growth rate since 2014.

Rising mortgage rates impact both housing supply and demand, limiting supply by reducing the propensity of sellers to sell and flattening demand by reducing consumer house-buying power. For home buyers, the only way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income.

The jump in mortgage rates reduced house-buying power by $36,000 since September 2017. Over the same period, household income growth increased consumer house-buying power by $10,000. The net effect? Overall consumer house-buying power fell by $26,000 in September compared with a year ago. At the moment, rising mortgage rates are winning the buying power tug-of-war with rising household incomes -- the pace of household income growth is not sufficient to fully offset the change in mortgage rates.

Where is Affordability Declining the Most?

As the age-old adage goes, housing is all about “location, location, location.” Affordability is no different. The five markets with the highest year-over-year growth in the RHPI are:

  1. Cleveland, OH (+28.2 percent)
  2. Las Vegas, NV (+26.6 percent)
  3. Cincinnati, OH (+23.8 percent)
  4. Atlanta, GA (+23.4 percent)
  5. Orlando, FL (+22.6 percent)

At first glance, these markets don’t seem to have much in common. Upon closer inspection, however, all five markets had household income growth below the national average of 2.9 percent. Orlando uniquely experienced a decline in household income of 0.4 percent compared with a year ago. The importance of household income growth’s ability to mitigate the loss of affordability from a rising mortgage rate is clear. Without stronger household income growth, rising mortgage rates will continue to impede consumer house-buying power, reducing affordability.

graph: Where is RHPI Increasing the Most?

Real house prices increased 2.0 percent between August 2018 and September 2018.

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