First American Real House Price Index

Real house prices changed

-38.2%

since the pre-recession peak

The First American Real House Price Index (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 and across the United States at the national, state and metropolitan area level. Because the RHPI adjusts for house-buying power, it is also a measure of housing affordability.

Mark Explains the Real House Price Index

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"Existing homeowners are increasingly prisoners in their own homes, limiting the supply of existing homes to the market. At the same time, first-time homebuyers, enticed by low mortgage rates, continue to enter the market, adding demand," says Chief Economist Mark Fleming.

What makes it a Real House Price Index?

House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country.

Why does the RHPI tell a different story than other house price measures?

Changing incomes and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases. Traditional measures of house price affordability are dependent on the assumption of specific loan terms (down payment, LTV, DTI) and the choice of income level (i.e. median or average household income). The RHPI is not dependent on any of these assumptions and so it more broadly reflects the real price experienced by consumers regardless of their income level or the loan terms specific to their situation.

3 Key Drivers

The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.

What do the RHPI number values mean?

The RHPI is set to equal 100 in January 2000. So, a state with an RHPI value of 110 in 2016 has seen real house prices increase 10 percent since 2000.

What does the RHPI reveal at a market level?

Let's consider San Francisco and Detroit and look at the RHPI for each.

Since the peak of the housing crisis in 2006, many metropolitan areas have experienced large drops in unadjusted house price levels followed by, in some cases, impressive gains. However, when measuring metropolitan house price appreciation using our consumer house-buying power adjusted Real House Price Indices, the story looks very different. For example, San Francisco and Detroit both experienced similar real price declines, about 60 percent over the course of three years, and very little "recovery" has occurred in real prices. The common perception is that San Francisco, the shining example of the new economy, and Detroit, the tarnished example of the old economy, couldn't be more different cities when it comes to housing costs. Yet, after adjusting for income growth and mortgage rates and their influence on house-buying power, real house prices in both cities remain well below the pre-recession peak. So, really how different are these two markets?

Real Prices - Peak to Current - San Francisco and Detroit

October 2017 Real House Price Index

Affordability Falls as Tight Supply Pushes Prices Higher

The First American Real House Price Index (RHPI) showed that in October 2017:

  • Real house prices increased 0.9 percent between September and October.
  • Real house prices increased 8.6 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.8 percent between September and October and fell 2.8 percent year over year.
  • Real house prices are 38.2 percent below their housing boom peak in July 2006 and 16.9 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 5.5 percent in October on a year-over-year basis and are 5.1 percent above the housing boom peak in 2007.

The RHPI is available below as an interactive tool that can be used to look up and compare real house prices at the state and metropolitan area levels, and also offers additional perspective on income and interest rate changes.

Tight Supply Continues to be a Drag on Affordability

  • According to Realtor.com, October marked the 38th consecutive month of year-over-year declines in inventory levels. The lack of supply is driving unadjusted house prices higher.
  • Both sources of future housing supply, new home building and the sale of existing homes, are not meeting market demand. The pace of new home building faces headwinds, and the fear of not being able to find something to buy is preventing homeowners from putting their homes on the market. Homeowners are increasingly becoming prisoners in their own homes.
  • The rise in mortgage rates over the past year and slow income growth have prompted a decline in consumer house-buying power. Strong unadjusted house price growth coupled with the decline in house-buying power means affordability has suffered, falling 8.6 percent compared with a year ago.
  • As the housing supply is expected to remain tight and mortgage rates are expected to rise in 2018, affordability is likely to continue to decline.
Chart: Affordability Decreases in October as Tight Supply Drives Prices Higher

"Over the past 12 months, affordability has declined as unadjusted house prices have increased faster than buying power and demand has continued to outpace supply. Existing homeowners are increasingly prisoners in their own homes, as the fear of not being able to find something to buy prevents homeowners from putting their homes on the market, limiting the supply of existing homes for sale. At the same time, first-time homebuyers, enticed by low mortgage rates, continue to enter the market, adding demand," said Mark Fleming, chief economist at First American. Homebuilders are also struggling to add more new-home inventory. Looking forward, the long and short (supply) of it is that the housing market in 2018 will be similar to the strong sellers' market we experienced in 2017.

Chart: Change in RHPI for Major Metropolitan Markets

About the First American
Real House Price Index

The traditional perspective on house prices is fixated on the actual prices and the changes in those prices, which overlooks what really matters to potential buyers - their purchasing power, or how much they can afford to buy. First American's proprietary Real House Price Index (RHPI) adjusts prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow.

The RHPI uses a weighted repeat-sales house price index that measures the price movements of single-family residential properties by time and across geographies, adjusted for the influence of income and interest rate changes on consumer house-buying power. The index is set to equal 100 in January 2000. Changing incomes and interest rates either increase or decrease consumer house-buying power. When incomes rise and mortgage rates fall, consumer house-buying power increases, acting as a deflator of increases in the unadjusted house price level. For example, if the unadjusted house price index increases by three percent, but the combination of rising incomes and falling mortgage rates increase consumer buying power over the same time period by two percent, then the Real House Price index only increases by 1 percent. The Real House Price Index reflects changes in house prices, but also accounts for changes in consumer house-buying power.

Disclaimer

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. © 2017 by First American. Information from this page may be used with proper attribution.