Affordability Reaches Possible Tipping Point, According to First American Real House Price Index
In August, rising demand for homes against limited supply accelerated house price appreciation, which overcame the affordability boost from rising house-buying power for the first time in 2020, says Chief Economist Mark Fleming
October 27, 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 August 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: The End of the Great Mortgage Rate-Powered Affordability Boost?
“Throughout 2020, falling mortgage rates have been the strongest influence on housing affordability trends, even helping fuel the housing market’s impressive recovery and resilience to the continuing economic fallout from the coronavirus pandemic. Mortgage rates began declining in January 2020 and even dropped below 3 percent for the first time ever in August.,” said Mark Fleming, chief economist at First American. “But, as mortgage rates have fallen and the housing market has recovered amid strong demand and historically low supply, nominal house price appreciation has rapidly accelerated. In August, the dynamics powering affordability may have reached a tipping point.
“Understanding the dynamics that influence consumer house-buying power – how much home one can buy based on changes in income and interest rates – provides helpful perspective on the housing market,” said Fleming.” When incomes rise, consumer house-buying power increases. When mortgage rates or nominal house prices rise, consumer house-buying power declines. Our Real House Price Index (RHPI) uses consumer house-buying power to adjust nominal house prices, offering insight into affordability.
“For example, according to our RHPI, real house prices decreased 5.7 percent year over year in August, marking a gain in affordability compared to a year ago. However, August also marks the first time since December 2019 that the RHPI increased on a month-over-month basis, indicating a more immediate-term decline in affordability, albeit small at 0.15 percent,” said Fleming. “Relative to July 2020, mortgage rates fell by 0.08 percentage points and household income increased by 0.27 percent. While these two forces improved house-buying power, it was not enough to offset the negative impact from nominal house price appreciation, which increased by 1.5 percent between July and August. Ultimately, this ‘tug-of-war’ between house-buying power and nominal house prices determines the fate of real house prices, and this month, nominal house price appreciation won.”
Nominal House Price Appreciation Outpaces Mortgage Rate and Income Growth Bump in August
“From July 2020 to August 2020, nominal house prices increased by 1.5 percent, reducing affordability. In July 2020, the median household income was approximately $71,180, which could purchase a home valued at $487,750, assuming a five percent down payment, said Fleming. “That home increased in value by 1.5 percent to roughly $494,900 in August, an increase of $7,155.
“According to our RHPI, the 0.08 percentage point decline in mortgage rates from July 2020 to August 2020 translates to a $5,087 improvement in house-buying power. As rates have fallen, household incomes for those who are still employed continued to rise modestly, said Fleming. “In August, the growth in household income increased consumer house-buying power by an additional $1,293. The combined effect of falling rates and rising household income in August was a $6,380 increase in house-buying power. The $7,155 increase in the home’s nominal price outpaced the $6,380 increase in house-buying power, so the prospective homebuyer lost approximately $775 in purchasing power between July and August 2020."
Does the Tipping Point Signal a Shift in Affordability Trends?
“Focusing on nominal house price fluctuations alone as an indication of changing affordability, or even the relationship between nominal house price growth and income growth, overlooks what matters more to potential buyers – house-buying power. You can only buy what you can afford to pay per month,” said Fleming. “In August, rising demand for homes against limited supply accelerated house price appreciation, which overcame the affordability boost from rising house-buying power for the first time in 2020.
“The good news is that affordability remains significantly higher than one year ago, mostly due to falling rates,” said Fleming. “One month does not make a trend, but this month’s decline in affordability signals that the current dynamics producing faster house price appreciation may begin to erode the affordability gains of recent years.”
August 2020 Real House Price Index
- Real house prices increased 0.15 percent between July 2020 and August 2020.
- Real house prices declined 5.7 percent between August 2019 and August 2020.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 1.3 percent between July 2020 and August 2020, and increased 15.6 percent year over year.
- Median household income has increased 6.1 percent since August 2019 and 71.7 percent since January 2000.
- Real house prices are 26.8 percent less expensive than in January 2000.
- While unadjusted house prices are now 15.3 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 48.5 percent below their 2006 housing boom peak.
August 2020 Real House Price State Highlights
- The three states with a year-over-year increase in the RHPI are: Wyoming (+1.9 percent), Oklahoma (+1.5 percent), and Ohio (+0.5 percent).
- The five states with the greatest year-over-year decrease in the RHPI are: New Hampshire (-9.5 percent), Massachusetts (-8.9 percent), California (-8.6 percent), Maryland (-8.4 percent), and Nevada (-7.7 percent).
August 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 (+4.9 percent), Cleveland (+3.4 percent), Seattle (+2.1 percent), San Antonio (+2.0 percent), and New Orleans (+1.8 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: San Francisco (-14.6 percent), San Jose, Calif. (-12.7 percent), Boston (-11.6 percent), San Diego (-9.7 percent), and Baltimore (-9.4 percent).
The next release of the First American Real House Price Index will take place the week of November 23, 2020 for September 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.