Affordability in Almost All Major Markets Continues to Improve in July, According to First American Real House Price Index
Rising household incomes and falling mortgage rates are currently boosting consumer house-buying power in many major metropolitan markets, more than offsetting any nominal gains in price levels, says Chief Economist Mark Fleming
September 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 July 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.
July 2016 Real House Price Index
The RHPI decreased in July 2016, falling 2.1 percent compared to June 2016 and 4.8 percent compared to July 2015.
“Unadjusted house prices are expected to increase by 5.0 percent in July on a year-over-year basis,” said Mark Fleming, chief economist at First American. “After adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom. Real house prices are 39.7 percent below their housing-boom peak in July 2006 and 21.5 percent below the level of prices in January 2000. Unadjusted, the national price level is 2.3 percent away from the housing-boom peak in 2007.”
Affordability in Almost All Major Markets Continues to Improve in July
“Real house prices declined on a year-over-year basis in 37 of the 43 metropolitan areas tracked by First American, as rising household incomes and low mortgage rates continue to foster meaningful growth in consumer house-buying power across of the majority of major metropolitan markets in July , which were sufficient to more than offset unadjusted price appreciation,” said Fleming. “Market price levels cannot be considered in isolation. The real price level must consider how income levels and interest rates influence the amount one can borrow. Virginia Beach, Va., Washington D.C., Cleveland, Oklahoma City and San Francisco continue to be at the top of the list for real house price declines and improved affordability, each experiencing year-over-year declines of 6.0 percent or more.
“The shortage of inventory listed for sale continues to be problematic, however, the gains in affordability are helping the market reach its potential for home sales. A rise in estimated median household incomes is also playing a large role in certain key markets that otherwise seem expensive when just considering nominal house prices, and not factoring in the boost in buying power provided by increased income levels in those markets,” said Fleming. “Again this month, increases in estimated median household incomes in both Washington D.C. and San Francisco, markets conventionally considered unaffordable, were enough to offset unadjusted price gains and bring meaningful affordability improvements in real terms to both markets.
July 2016 Real House Price State Highlights
- The four states with the highest year-over-year increase in the RHPI are: Wyoming (+2.5 percent), Michigan (+1.4 percent), Oregon (+0.3 percent) and Nevada (+0.1 percent).
- The five states with the highest year-over-year decrease in the RHPI are: New Jersey (-9.3 percent), Iowa (-9.1 percent), Arkansas (-8.6 percent), Virginia (-8.5 percent) and Nebraska (-8.5 percent).
July 2016 Real House Price Local Market Highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), the three markets with the highest year-over-year increase in the RHPI are: Jacksonville, Fla. (+5.7 percent), Tampa, Fla. (+3.3 percent), Charlotte, N.C. (+0.8 percent), Sacramento, Calif. (+0.8 percent), and Detroit (+0.3 percent).
- Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in the RHPI are: Virginia Beach, Va. (-8.6 percent), Washington D.C. (-7.2 percent), Cleveland (-6.8 percent), Oklahoma City (-6.7 percent), and San Francisco (-6.2 percent).
Low Rates and Increased Wages a Plus for U.S. Home Buyers
“Real house prices fell in the month of July due to a drop in the average rate for the 30-year, fixed-rate mortgage from 3.57 percent to 3.44 percent between June 2016 and July 2016, alongside an estimated 0.7 percent increase in household income for the same period,” said Fleming. “This comes as the Federal Open Market Committee (FOMC) decided to hold the federal funds rate steady for the time being, despite an increasing labor force participation rate and rising wages.
“International economic instability and lower than target core inflation gave the FOMC pause this week as they decided to hold the federal funds rate steady in their September meeting,” said Fleming. “The continued low rates will only be a positive to U.S. home buyers. Low rates combined with meaningful gains in wages brings greater buying power and housing affordability.”
“U.S. mortgage rates have remained low due to the paradoxical impact of international economic instability, as investors flee to the relative safe-haven of the 10-year Treasury note, amongst other U.S. bonds, which, in turn, boosts affordability for U.S. home buyers,” said Fleming. “As potential home buyers continue to enjoy increased buying power driven by low rates and higher wages, we will all wait with baited breath for what the December FOMC meeting brings us.”
The next release of the First American Real House Price Index will be the week of October 24, 2016 for August 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.