Housing Market Can Thrive in a Rising-Rate Era, According to First American Real House Price Index

Economic and demographic context matters and, even if rising rates persist in 2021, the context is good for the housing market, asks Chief Economist Mark Fleming

January 26, 2021, 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 November 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: Real House Prices Declined 6.2 Percent Year Over Year in November

“Even though nominal house prices continued to surge, affordability improved in November as two of the three key drivers of the RHPI, household income and mortgage rates, swung in favor of increased affordability,” said Mark Fleming, chief economist at First American. “Real house prices declined by 6.2 percent relative to one year ago, thanks to the benefit of increased buying power.”

“While mortgage rates fell in November, in more recent data from January 2021, mortgage rates have increased slightly due to a more positive economic outlook,” said Fleming. “The uptick in rates sparked questions about how the housing market will react as rates rise.”

Existing-Home Sales When Mortgage Rates Rise

 “Historically, when mortgage rates rise, existing-home sales don’t necessarily fall. We examined how the housing market responded to six significant rising-rate eras over the last 30 years. The 2005-2006 rising-rate era preceding the 2008 housing crisis stands out because existing-home sales fell dramatically. Existing-home sales also decreased in the 1994 rising-rate era, as the Federal Reserve increased the federal funds rate to prevent strong economic growth from feeding inflation,” said Fleming. “However, in the four other rising-rate eras we examined, existing-home sales increased (1996, 1998-2000, 2013), or only declined after prolonged resistance (2017-2018). Context matters and each rising-rate era is different. The housing market response depends on the reason why rates are rising.” 

House Prices Are Even More Resilient

“We also looked at how unadjusted house prices reacted in the same six rising-rate eras. House prices are clearly resistant to rising mortgage rates. Apart from the 1994 rising-rate period, when house prices declined slightly and briefly, house prices have always continued to rise, albeit more slowly, when rates have increased,” said Fleming. “In the 2005-2006 housing bubble, house prices eventually declined after initially increasing, but never declined below the level at the beginning of the rising-rate era.

“In the longest rising mortgage rate era, 1998-2000, nominal house prices increased consistently with the economic recovery from the previous recession. In just over a year and a half, house prices increased 14 percent,” said Fleming. “House price appreciation is resistant to rising mortgage rates primarily because home sellers would rather withdraw from the market than sell at lower prices – a phenomenon we refer to as ‘downside sticky.’” 

Housing Market is Resilient to Rising Rates

“The lesson? Context matters and prices are ‘downside sticky.’ The housing market is complex and dynamic, and it responds to a variety of demographic, economic and monetary conditions. Rising interest rates reduce house-buying power and affordability, but are often a sign of a strong economy, which increases home buyer demand,” said Fleming. “By any historic standard, today’s mortgage rates remain historically low and will continue to boost house-buying power and keep purchase demand robust. At the same time, millennials aging into their prime home-buying years and a limited supply of homes for sale make for a housing market that is well positioned for rising rates. Economic and demographic context matters and, even if rising rates persist in 2021, the context is good for the housing market.” 

November 2020 Real House Price Index

  • Real house prices increased 0.5 percent between October 2020 and November 2020.
  • Real house prices declined 6.2 percent between November 2019 and November 2020.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 1.0 percent between October 2020 and November 2020, and increased 18.9 percent year over year.
  • Median household income has increased 5.8 percent since November 2019 and 72.1 percent since January 2000.
  • Real house prices are 26 percent less expensive than in January 2000.
  • While unadjusted house prices are now 19.4 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 48.0 percent below their 2006 housing boom peak. 

November 2020 Real House Price State Highlights

  • The only state with a year-over-year increase in the RHPI is Wyoming (+2.3 percent).
  • The five states with the greatest year-over-year decrease in the RHPI are: California (-9.3 percent), Massachusetts (-8.5 percent), Louisiana (-8.5 percent), New York (-7.7 percent), and Hawaii (-7.7 percent). 

November 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: Cleveland (+4.7 percent), Pittsburgh (+2.4 percent), Kansas City, Mo. (+2.3 percent), Hartford, Conn. (+1.2 percent), and Memphis, Tenn. (+0.7 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 (-17.5 percent), San Jose, Calif. (-14.0 percent), Boston (-12.2 percent), Miami (-11.0. percent), and San Diego (-9.7 percent). 

Next Release

The next release of the First American Real House Price Index will take place the week of February 22, 2021 for December 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. © 2021 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.