House Prices May Have Reached Tipping Point, According to First American Real House Price Index
The housing market may be down, but it may be better positioned than many believe, says Chief Economist Mark Fleming
April 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 February 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.
February 2020 Real House Price Index
- Real house prices decreased 1.6 percent between January 2020 and February 2020.
- Real house prices declined 5.8 percent between February 2019 and February 2020.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 2.5 percent between January 2020 and February 2020, and increased 14.6 percent year over year.
- Median household income has increased 2.7 percent since February 2019 and 60.0 percent since January 2000.
- Real house prices are 19.8 percent less expensive than in January 2000.
- While unadjusted house prices are now 10.3 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 42.8 percent below their 2006 housing boom peak.
Chief Economist Analysis: Examining House Price Trends in Recent Recessions
“As the coronavirus outbreak continues to affect the domestic and global economy, the housing market has shown that it is not immune to its impact. In March, the number of existing-home sales fell 8.5 percent relative to February, and the number of new listings continued to dwindle,” said Mark Fleming, chief economist at First American. “While mortgage rates have fallen due to the current economic uncertainty, stay-at-home orders have made it more difficult for potential home buyers to take advantage of the affordability boost, and first-time home buyers may have an even more difficult time as lenders have tightened credit availability. Despite all of the headwinds, homes continue to be bought and sold, but how will the changing dynamics of supply and demand impact house prices?”
Why House Prices Tend to Be ‘Downside Sticky’ During Recessions
“While every recession is different, we examined how the three most recent recessions impacted house prices for insight into how house prices may fare in the current environment,” said Fleming. “With the exception of the 2008-2009 recession, house prices have demonstrated their ‘downside stickiness,’ zero or slow growth, but not much decline.
“The ‘downside stickiness’ of house prices is unique because typically aggregate demand shocks put a lot of downward pressure on the prices of goods and services, but in the housing market, sellers often withdraw supply rather than sell at lower prices. This dynamic played out in March, as the supply of homes for sale declined by 10.2 percent compared with one year ago,” said Fleming. “House prices declined in the 2008-2009 recession because homes were overvalued, mortgages were riskier and many homeowners had little equity, which resulted in a dramatic increase of foreclosures and distressed selling. Today’s housing market is fundamentally different.
“Heading into 2020, record low inventory, combined with income and employment growth, tighter mortgage underwriting, and strong economic fundamentals, fueled price appreciation that was very different from the housing boom that peaked in 2006,” said Fleming. “House prices were rising before the pandemic because of a lack of supply of homes for sale, strong demand fueled by near record low mortgage rates and the robust underlying economic fundamentals of what was the longest expansion in U.S. history until March 2020.”
What to Expect for the Spring Home-Buying Season?
“As buyers and sellers pull back from the market and some sellers adjust their price expectations, it’s reasonable to expect a reduction in home sales and a moderation in house price appreciation in this year’s spring home-buying season,” said Fleming. “Yet, transactions will continue to occur. The housing market may be down, but it may be better positioned than many believe.”
February 2020 Real House Price Index
“In February 2020, a month before the coronavirus outbreak took hold in the U.S., the RHPI confirmed the housing market’s surging momentum. Two of the three key drivers of the RHPI swung in favor of increased affordability in February. The labor market showed continued strength, as rising average hourly earnings resulted in a 2.7 percent yearly increase in household income,” said Fleming. “Additionally, compared with February 2019, the 30-year, fixed-rate mortgage fell by 0.9 percentage points. So, consumer house-buying power – how much one can buy based on changes in income and interest rates – continued to grow, boosting affordability and working offsetting the negative impact from rising house price appreciation.”
February 2020 Real House Price State Highlights
- The only state with a year-over-year increase in the RHPI is: New Jersey (+1.5 percent).
- The five states with the greatest year-over-year decrease in the RHPI are: Hawaii (-8.7 percent), New Mexico (-8.6 percent), Colorado (-8.5 percent), California (-8.2 percent), and Utah (-8.0 percent).
February 2020 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the two markets with a year-over-year increase in the RHPI are: Cleveland (+0.4 percent) and Milwaukee (+0.3 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 (-10.8 percent), Denver (-9.5 percent), Las Vegas (-9.4 percent), Riverside, Calif. (-9.1 percent), and San Jose, Calif. (-8.9 percent).
The next release of the First American Real House Price Index will take place the week of May 25, 2020 for March 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.