Affordability Improving Nationally Despite Strong Nominal House Price Appreciation, According to First American Real House Price Index
Recent history has shown that in times of economic distress, lower mortgage rates have offset the affordability drag from faster house price appreciation and lower household income, says Chief Economist Mark Fleming
September 28, 2020, 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 2020 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.
Chief Economist Analysis: Falling Rates, Rising Income Offset Nominal House Price Appreciation in July
“Affordability improved in July as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of increased affordability, outpacing the rise in nominal house price appreciation. The average 30-year, fixed mortgage rate fell by 0.75 percentage points and household income increased 5.5 percent compared with July 2019,” said Mark Fleming, chief economist at First American. “Declining mortgage rates and rising household income levels both increase consumer house-buying power. So, even though nominal house price appreciation jumped 8.2 percent annually in July, it was not enough to offset the affordability boost from declining rates and rising household income.
“While there remains debate regarding the actual end date of the 2020 recession, there is no argument that the economic pain inflicted by the coronavirus continues to linger. Yet, housing affordability nationally has improved, and the housing market remains resilient,” said Fleming. “But, how have nominal house prices and affordability fared in previous economic declines and what can that tell us about today’s housing market?”
How Nominal House Prices Fare During Recessions
“We examined how nominal house prices and the RHPI reacted to the four most recent recessions, including the current pandemic-driven economic downturn,” said Fleming. “It is important to note that a declining RHPI trend line indicates improving affordability, and a rising RHPI trend line signals worsening affordability.
“With the exception of the Great Recession in 2008-2009 and a modest decline in the 1990 recession, nominal house prices have remained flat or risen slowly, but have not declined,” said Fleming. “This demonstrates the “downside stickiness” of house prices during economic decline. In the pandemic-driven recession of 2020, we’ve seen house price appreciation grow faster than in any of the economic declines in our recent past.
“This phenomenon of continued house price appreciation amid economic decline is unique to the housing market because sellers tend to withdraw supply to wait out the economic storm, rather than sell at lower prices,” said Fleming. “During the Great Recession, house prices declined because of a flood of foreclosures and distressed selling, which were a product of rapid house price appreciation not entirely supported by economic fundamentals. In today’s market, nominal house price appreciation has been driven by a historic shortage of supply relative to demand.”
Real House Prices Then Versus Now
“In three of the four economic downturns we examined, affordability as measured by the RHPI improved. Why? The RHPI adjusts nominal house prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow. While nominal house prices may continue to rise during a recession and median household incomes tend to remain the same or fall, mortgage rates typically decline,” said Fleming. “The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond and, in times of economic uncertainty, investors flee stocks and rush to bonds, pushing yields down, which brings mortgage rates down as well.
“The only exception is the 2001 recession, when incomes fell and house price appreciation continued to rise, while mortgage rates also increased slightly at the beginning of the recession, causing a modest decline in affordability,” said Fleming. “The interplay between mortgage rates, income, and house price appreciation drive affordability trends. In the 2020 economic downturn, while house prices have continued to rise, rates have fallen to historic lows and income has grown modestly, resulting in an affordability boost.”
Will the Trend Continue?
“Nominal house price appreciation is showing no signs of slowing down, as supply and demand imbalances persist. While mortgage rates have, thus far, won the affordability tug-of-war nationally, some housing markets are beginning to feel the impact of pandemic-driven job losses on household income levels,” said Fleming. “In these markets, accelerating house price appreciation, in conjunction with flat or falling income levels, is dragging affordability down. The lesson? Affordability is resilient in the face of economic downturns, but just how resilient depends on the dynamics of mortgage rates, income, and house price appreciation.”
July 2020 Real House Price Index
- Real house prices decreased 0.8 percent between June 2020 and July 2020.
- Real house prices declined 6.6 percent between July 2019 and July 2020.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 2.2 percent between June 2020 and July 2020, and increased 15.8 percent year over year.
- Median household income has increased 5.5 percent since July 2019 and 70 percent since January 2000.
- Real house prices are 26 percent less expensive than in January 2000.
- While unadjusted house prices are now 14.2 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 48 percent below their 2006 housing boom peak.
July 2020 Real House Price State Highlights
- The only state with a year-over-year increase in the RHPI is Wyoming (+1.5 percent).
- The five states with the greatest year-over-year decrease in the RHPI are: Massachusetts (-11.4 percent), New Hampshire (11.0 percent), Nevada (-10.5 percent), Maryland (-9.5 percent), and California (-9.4 percent).
July 2020 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: Pittsburgh (+4.2 percent), Cleveland (+2.2 percent), Seattle (+1.7 percent), Houston (+1.4 percent), and New Orleans (+1.0 percent).
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year decrease in the RHPI are: Boston (-13.8 percent), San Francisco (-13.5 percent), San Jose, Calif. (-12.2 percent), Baltimore (-11.2 percent), and San Diego (-11.2 percent).
The next release of the First American Real House Price Index will take place the week of October 26, 2020 for August 2020 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. © 2020 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 $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2020, First American was named to the Fortune 100 Best Companies to Work For® list for the fifth consecutive year. More information about the company can be found at www.firstam.com.