The Top Five Cities for Consumer House-Buying Power, According To First American Real House Price Index
If house prices rise, but house-buying power rises further, are homes less affordable?, asks Chief Economist Mark Fleming
July 30, 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 May 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.
May 2018 Real House Price Index
Real house prices increased 1.5 percent between April 2018 and May 2018.
Real house prices increased 11.4 percent year over year.
Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 1.0 percent between April 2018 and May 2018, and declined 3.6 percent year over year.
Real house prices are 36.9 percent below their housing boom peak in July 2006 and 11.0 percent below the level of prices in January 2000.
Unadjusted house prices increased by 7.3 percent in May on a year-over-year basis and are 0.8 percent above the housing boom peak in 2006.
Chief Economist Analysis: Why Consumer House-Buying Power Matters
“The three key drivers of the RHPI are household income levels, the 30-year, fixed mortgage rate, and the unadjusted house price index. Changes to household income levels and the 30-year, fixed mortgage rate are considered together as consumer house-buying power,” said Mark Fleming, chief economist at First American. “When household income rises and/or the mortgage rate falls, consumer house-buying power increases.”
The Bad News: Affordability Declined Year-Over-Year
“In May 2018, all three of the RHPI components increased compared with the year before. The 30-year, fixed mortgage rate increased by 0.6 percent, and the unadjusted house price index increased by 7.3 percent,” said Fleming. “Household income, which contributes positively to housing affordability, also increased 3.2 percent since May 2017. The result when you factor in all three influences – an 11.4 percent increase in the Real House Price Index nationally and an increase in the RHPI in all markets compared with a year ago.”
The Good News: Consumer House-Buying Power is Up 23.6 percent since 2011
“Unadjusted house prices are 0.8 percent above the housing market peak in 2006, and have been increasing since the end of 2011, nearly a seven-year run. However, consumer house-buying power has also increased by 55 percent since the housing boom peak in 2006 – that’s 69 times the increase in unadjusted house prices,” said Fleming. “House-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage rate, has benefited from a declining rate environment, and slow, but steady household income growth. Nationally, since the start of the nearly seven-year run of increasing unadjusted house prices in 2011, house-buying power has increased 23.6 percent.”
Top Five Cities for House-Buying Power
“But, real estate is local and house-buying power differs between cities,” said Fleming. “Using a city's annual median household income, assuming that a household spends one-third of their income on a mortgage, and considering the current 30-year, fixed-rate mortgage rate, the five cities with the greatest consumer house-buying power in May 2018 are:
San Jose, CA: $660,884
Washington, DC: $633,093
San Francisco, CA: $583,496
Boston, MA: $509,520
Seattle, WA: $486,574
House-Buying Power Outpaces Unadjusted House Price Growth
“Unsurprisingly, the top five cities coincide with the five cities with the highest household income – make more (money) to buy more (house). These cities also boast higher than national average household income growth – 4.9 percent from May 2017 to May 2018,” said Fleming.
“Since the housing market peak in 2006, household income has increased, on average, 44.5 percent for these cities and the 30-year, fixed-rate mortgage rate has fallen from 6.3 percent to 4.6 percent,” said Fleming. “As a result, average house-buying power across these five cities has increased 74.7 percent since the housing market peak, considerably outpacing the 22.5 percent growth in unadjusted house prices. If house prices rise, but house-buying power rises further, are homes less affordable?
“When house prices are adjusted for consumer house-buying power, the ‘real’ level of house prices becomes more apparent. Nationally, real, consumer house-buying power-adjusted house prices (RHPI) today remain 36.9 percent below their peak, and 11.0 percent below their level in the year 2000,” said Fleming. “Across the five markets with the highest house-buying power, real, consumer house-buying power-adjusted house prices (RHPI) today remain 31.3 percent below the housing market peak, but are 8.2 percent above their level in the year 2000. Why are house prices in these coastal markets so much higher than the national level? Because home buyers have the income to afford them.”
May 2018 Real House Price State Highlights
The five states with the greatest year-over-year increase in the RHPI are: Nevada (+18.8 percent), New Hampshire (+17.2 percent), New York (+17.0 percent), Delaware (+16.5 percent) and Ohio (+16.2 percent).
No state had a year-over-year decrease in the RHPI in May.
May 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: San Jose, Calif. (+25.6 percent), Cleveland (+22.6 percent), Las Vegas (+22.2 percent), Jacksonville, Fla. (+17.4 percent), and Columbus, Ohio (+17.1 percent).
No CBSA had a year-over-year decrease in the RHPI in May.
The next release of the First American Real House Price Index will take place the week of August 27, 2018 for June 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.