First American Real House Price Index

Real house prices changed

-32.5%

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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"Even though unadjusted house prices are higher today than ever before, consumer house-buying power remains strong, so real house prices aren't even close to their historical peak," 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

March 2018 Real House Price Index

The First American Real House Price Index (RHPI) showed that in March 2018:

  • Real house prices increased 1.7 percent between February 2018 and March 2018.
  • Real house prices increased 6.4 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 1.1 percent between February 2018 and March 2018, and was unchanged year over year.
  • Real house prices are 32.5 percent below their housing boom peak in July 2006 and 9.2 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 6.4 percent in March on a year-over-year basis and are 8.7 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.

Unadjusted House Prices are Higher than Ever Before, But What is the Real Story?

As the home-buying season continues, the inventory of homes for sale remains historically low, while demand is increasing. Not surprisingly, house prices continue to rise. In March, unadjusted house prices increased by 6.4 percent compared with a year ago and they are now 8.7 percent above the housing boom peak for unadjusted house prices reached in 2007. But, does that tell the real story?

While unadjusted house prices have been on the rise since the end of 2011, nearly a seven-year run, consumer house-buying power has also increased by 14.3 percent over the same period. House-buying power, how much one can buy based on changes in income and interest rates, has benefited from a decline in mortgage rates since 2011, and the more recent slow, but steady growth of household income. Between the peak of unadjusted house prices in 2011 and today, the 30-year, fixed-rate mortgage has fallen from 5.0 percent to 4.4 percent in March. Over the same period, household income has increased 19 percent. Lower mortgage rates and higher income levels means significantly higher house-buying power today than at the end of 2011.

When house prices are adjusted for consumer house-buying power, the real level of house prices becomes more apparent. Consumer house-buying power-adjusted house prices dropped just over 50 percent from the peak in July 2007 to the trough reached at the end of 2012. Real house prices have since increased, but today remain 32.5 percent below the 2007 peak and 9.2 percent below their level in the year 2000. Even though unadjusted house prices are higher today than ever before, consumer house-buying power remains strong, so real house prices aren’t even close to their historical peak.

Even though unadjusted house prices are higher today than historically ever before, consumer house-buying power remains strong, so real house prices aren’t even close to their historical peak.

Chart: House-Buying Power Adjusted Far From The Peak

Even though mortgage rates are a quarter percent higher than a year ago, household income has increased enough to offset the impact of higher rates, so consumer house-buying power remained unchanged compared to a year ago.

While unadjusted house prices are now 8.7 percent above the housing boom peak in 2007, real, house-buying power adjusted house prices are 32.5 percent below their housing boom peak, which was reached in July 2006.

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 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 house price level. For example, if the house price index increases by three percent, but the combination of rising incomes and falling mortgage rates increase consumer buying power over the same 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. © 2018 by First American. Information from this page may be used with proper attribution.