Affordability Improves Nationally Based on Wage Growth, Although Not for Many Major Markets, According to First American Real House Price Index
While mortgage rates above 4 percent reduce affordability, accelerating wage growth and the expected slowdown in unadjusted price appreciation are both beneficial for affordability, says Chief Economist Mark Fleming
December 26, 2016, 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 September 2016 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 and across the United States at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
October 2016 Real House Price Index
- Real house prices increased 0.7 percent between September 2016 and October 2016
- Compared to September 2015, real house prices decreased by 0.4 percent.
- Unadjusted house prices are expected to increase by 5.3 percent in October on a year-over-year basis.
- Real house prices are 39.9 percent below their housing-boom peak in July 2006 and 19.2 percent below the level of prices in January 2000.
- Unadjusted, the national price level is 0.01 percent below the housing-boom peak in 2007.
Chief Economist Analysis: Wage Growth Offsets Rising Interest Rates and Unadjusted Prices to Increase Affordability Nationally, Although Not for Many Major Markets
“While we have yet to see the impact of the ‘Trump Bump’ and Yellen’s increase in mortgage rates on unadjusted house prices, I expect there to be an impact early next year. In 2013, we saw the significant slowing effect the ‘taper-tantrum’ had on unadjusted house prices. We expect unadjusted prices to respond similarly to the recent increases in mortgage rates, though to a lesser degree this time,” said Mark Fleming, chief economist at First American. “While mortgage rates above 4 percent reduce affordability, accelerating wage growth and the expected slowdown in unadjusted price appreciation are both beneficial for affordability. I expect the net effect on consumer house-buying power to remain modest.
“Preceding the FOMC meeting earlier this month, we assessed the impact of rate changes on real house prices and affordability looking ahead to the end of 2017. While existing homeowners with fixed-rate mortgages will feel no affordability impact, potential first-time homebuyers will have to adjust their expectation for what they can afford. The post-election rate increase, as well as the expected path of FOMC Federal Funds rate increases next year, leads me to forecast a 4.4 percent increase in real prices by the end of next year,” said Fleming.
Additional Quotes from Chief Economist Mark Fleming
- “Real house prices decreased on a year-over-year basis in the month of October as mortgage rates were still significantly lower than last year, falling from 3.80 percent to 3.47 over the twelve-month period.”
- “In October, wages grew 2.8 percent year-over-year, the fastest pace since the beginning of the financial crisis.”
- “However, increasing mortgage rates and rising house prices are putting upward pressure on real prices in many local housing markets.”
- “Real house prices declined on a year-over-year basis in only 8 of the 43 metropolitan areas tracked by First American, as tight supply continues to drive up unadjusted prices, which have yet to slow in response to the recent increases in mortgage rates.”
- “San Francisco, Virginia Beach, Va., and San Jose, Calif. are at the top of the list for improved affordability, each experiencing year-over-year real house price declines of 2.0 percent or more.”
October 2016 Real House Price State Highlights
- The five states with the highest year-over-year increase in the RHPI are: Wyoming (+6.2 percent), Nevada (+5.3 percent), Maine (+4.7 percent), Colorado (+4.4 percent) and Michigan (+4.3 percent).
- The five states with the highest year-over-year decrease in the RHPI are: Maryland (-4.9 percent), New Jersey (-4.5 percent), North Dakota (-3.7 percent), Iowa (-3.3 percent) and District of Columbia (-3.2 percent).
October 2016 Real House Price Local Market Highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest year-over-year increase in the RHPI are: Charlotte, N.C. (+9.8 percent), Jacksonville, Fla. (+9.8 percent), Tampa, Fla. (+7.5 percent), Columbus, Ohio (+6.6 percent), and Detroit (+5.8 percent).
- Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in the RHPI are: San Francisco (-5.3 percent), Virginia Beach, Va. (-4.0 percent), San Jose, Calif. (-2.4 percent), Milwaukee (-0.9 percent), and Baltimore (-0.5 percent).
The next release of the First American Real House Price Index will be the week of January 23, 2017 for November 2016 data.
The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
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. © 2016 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 investment advisory services. With revenues of $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.