Housing Overvaluation Not as Prevalent as Many Believe, According to First American Real House Price Index
Except in a few markets in California, median house-buying power exceeds the median sale price in many markets, says Chief Economist Mark Fleming
May 22, 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 March 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.
March 2020 Real House Price Index
- Real house prices increased 1.1 percent between February 2020 and March 2020.
- Real house prices declined 4.7 percent between March 2019 and March 2020.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.1 percent between February 2020 and March 2020, and increased 12.5 percent year over year.
- Median household income has increased 1.9 percent since March 2019 and 59.2 percent since January 2000.
- Real house prices are 18.4 percent less expensive than in January 2000.
- While unadjusted house prices are now 11.5 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 42.1 percent below their 2006 housing boom peak.
Chief Economist Analysis: Overvaluation Overblown?
“In March, data began to reveal the depth of the impact from the pandemic on the housing market. 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 historically low mortgage rates make it more affordable for those with stable incomes to buy a home, tightening credit standards make it more difficult for some to obtain financing and many home buyers struggle to find the home they want due the limited inventory of homes for sale.
“Many still bear scars from the Great Recession and may expect the housing market to follow a similar trajectory in response to the pandemic. Yet, there are several key differences between ‘then’ and ‘now,’ one of which is that housing was overvalued on the eve of the Great Recession, but today house-buying power nationally is nearly double the median sale price of a home,” said Fleming. “However, as the adage goes, it’s all about “location, location, location,” so let’s examine the extent of housing overvaluation at the market level.”
California Markets Overvalued
“One measure of overvaluation is comparing the median sale price of a home in a given market with the median house-buying power – how much one can buy based on changes in income and interest rates. If housing is appropriately valued, median house-buying power should equal or exceed the median sale price of a home,” said Fleming. “In March 2020, only four of the 44 markets we track were overvalued by this measure. All four overvalued markets are in California and the San Jose was the most overvalued market. In San Jose, the median house-buying power in March was approximately $827,000, significantly below the median sale price of a home at $1.07 million. San Francisco, Los Angeles, and San Diego were also overvalued, although to a lesser extent.
“There were only two time periods in the last 20 years when the California housing market was not overvalued: from 2000 through 2002 and 2009 through 2013. Overvaluation of housing in California peaked in July 2007, when the median sale price of a home was nearly double the median house-buying power,” said Fleming. “Today, the gap is much narrower, indicating that even in California, housing is in a better position now than it was at the onset of the Great Recession.”
Most Markets Are Not Overvalued
“With the exception of the four California markets, the remaining 40 markets we track are not considered overvalued. In fact, in March 2020, the average percent difference between median house-buying power and the median sale price of a home in these 40 markets was 58 percent. Rising household income and a historically low mortgage rate environment has propelled house-buying power growth, outpacing house price appreciation,” said Fleming. “Nationally, strong median house-buying power relative to median sale price implies that housing is not overvalued today. Even at the market level, housing overvaluation is not as prevalent as many believe. The challenge for home buyers is finding something to buy.”
March 2020 Real House Price Index
“In March 2020, the month the pandemic took hold in the U.S., the Real House Price Index (RHPI) began to show signs of an impact on affordability. While still more affordable than one year ago, the RHPI increased 1.1 percent month over month, a sign of reduced affordability,” said Fleming. “Compared with February 2020, the 30-year, fixed-rate mortgage fell by 0.02 percentage points. Yet, household income fell by 0.3 percent compared with February, so consumer house-buying power – how much one can buy based on changes in income and interest rates – declined 0.1 percent compared with last month. The decline in house-buying power, combined with continued acceleration in nominal monthly house price appreciation, fueled the monthly increase in the RHPI (affordability declined).”
March 2020 Real House Price State Highlights
- The only state with a year-over-year increase in the RHPI is: Rhode Island (+0.2 percent).
- The five states with the greatest year-over-year decrease in the RHPI are: Hawaii (-9.5 percent), California (-8.7 percent), New Mexico (-8.7 percent), Illinois (-8.4 percent), and Utah (-7.8 percent).
March 2020 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the only market with a year-over-year increase in the RHPI is: Cleveland (+0.4 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 (-12.0 percent), Las Vegas (-10.4 percent), Boston (-9.5 percent), San Jose, Calif. (-9.4 percent), and Baltimore (-9.4 percent).
The next release of the First American Real House Price Index will take place the week of June 29, 2020 for April 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.