Historical Data Shows House Prices Resilient to Rising Rates, According to First American Real House Price Index
The tug-of-war between rising mortgage rates and increasing household income doesn’t necessarily mean that house prices will decline. In fact, history tells us otherwise, says Chief Economist Mark Fleming
December 21, 2018, 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 October 2018 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 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 2018 Real House Price Index
Real house prices increased 2.9 percent between September 2018 and October 2018.
Real house prices increased 16.2 percent year over year.
Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 1.9 percent between September 2018 and October 2018, and declined 7.7 percent year over year.
Average household income has increased 3.0 percent since October 2017 and 53.7 percent since January 2000.
Real house prices are 35.5 percent below their housing boom peak in August 2006 and 9.0 percent below the level of prices in January 2000.
Chief Economist Analysis: How a Strong Economy Can Slow the Housing Market
“For the second consecutive month, all three key drivers of the Real House Price Index (RHPI), household income, mortgage rates, and the unadjusted house price index, increased compared with a year ago,” said Mark Fleming, chief economist at First American. “The 30-year, fixed-rate mortgage and the unadjusted house price index increased by 0.9 percentage points and 7.3 percent respectively. Even though household income increased 3.0 percent since October 2017 and boosted consumer house-buying power, the Real House Price Index increased 16.2 percent compared with last October, the highest yearly growth rate since 2014.
“In 2018, the housing market has largely been a victim of the economy’s success. The Federal Reserve is trying to keep inflation in check by increasing short-term interest rates and reducing their holdings of Treasury bonds and mortgage-backed securities,” said Fleming. “The Fed’s moves have pressured mortgage rates higher and made buying a home more expensive. Meanwhile, the healthy economy and robust labor market in 2018 has supported home buyer demand.
“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,” said Fleming. “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 increase in mortgage rates since last October has reduced house-buying power by $41,000. Over the same period, household income growth increased consumer house-buying power by nearly $11,000. The net result is overall consumer house-buying power fell by $30,000 in October compared with a year ago,” said Fleming. “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.”
Do Rising Mortgage Rates Always Lead to Falling House Prices?
“Increasing mortgage rates have been a defining feature of the 2018 housing market. Many people may expect house prices to decline when rates rise, but their effect on home prices may not be as straightforward as you think,” said Fleming.
“We analyzed unadjusted house prices in seven rising mortgage rate eras over the past 25 years. The trend is clear – house prices are resistant to rising mortgage rates,” said Fleming. “Apart from the 1993-94 rising-rate period, when house prices declined slightly and briefly, they have always ended the rising-rate era higher than when it started.
“In the longest rising mortgage rate era, 1998-2000, nominal house prices increased nearly 15 percent in just 19 months as the economy expanded rapidly,” said Fleming. “At the time, the economy was defined by tight labor markets and low inflation, all contributing to a healthy housing market.
“Today, as mortgage rates increase, house prices are rising at a pace similar to the 1998-2000 era. Over the last 13 months, nominal house prices have increased by 8.0 percent,” said Fleming. “This compares to the first 13 months of the 1998-2000 rising mortgage-rate era, when house prices increased 8.4 percent.”
Economic Environment More Influential than Mortgage Rates
“The lesson? House prices are often resilient to rising mortgage rates, but just how resilient depends on the economic environment. Ultimately, rising interest rates are indicative of a growing economy, which benefits consumers and increases home buyer demand,” said Fleming. “The tug-of-war between rising mortgage rates and increasing household income doesn’t necessarily mean that house prices will decline. In fact, history tells us otherwise.”
October 2018 Real House Price State Highlights
The five states with the greatest year-over-year increase in the RHPI are: Ohio (+22.6 percent), Nevada (+22.2 percent), Georgia (+21.0 percent), New Hampshire (+20.7 percent), and New Jersey (+20.6 percent).
No state had a year-over-year decrease in the RHPI in October.
October 2018 Real House Price Local Market Highlights
Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Cleveland (+30.6 percent), Cincinnati (+24.8 percent), Las Vegas (+24.6 percent), San Antonio (+24.4 percent) and Atlanta (+22.7 percent).
No CBSA had a year-over-year decrease in the RHPI in October.
The next release of the First American Real House Price Index will take place the week of January 28, 2019 for November 2018 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. © 2018 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; banking, trust and wealth management services; and other related products and services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com.