First American Real House Price Index

Real house prices changed

-35.5%

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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"The tug-of-war between rising mortgage rates and increasing household income doesn't necessarily mean that house prices will decline. In fact, history tells us otherwise," asks 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 2018 Real House Price Index

How Does a Strong Economy Slow the Housing Market?

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

  • Real house prices increased 2.9 percent between September 2018 and October 2018.
  • Real house prices increased 16.2 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 1.9 percent between September 2018 and October 2018, and declined 7.7 percent year over year.
  • Average household income has increased 3.0 percent since October 2017 and 53.7 percent since January 2000.
  • Real house prices are 35.5 percent below their housing boom peak in August 2006 and 9.0 percent below the level of prices in January 2000.

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.

For the second consecutive month, all three key drivers of the Real House Price Index (RHPI), household income, mortgage rates, and the unadjusted house price index, increased compared with a year ago. The 30-year, fixed-rate mortgage and the unadjusted house price index increased by 0.9 percentage points and 7.3 percent respectively. Even though household income increased 3.0 percent since October 2017 and boosted consumer house-buying power, the Real House Price Index increased 16.2 percent compared with last October, the highest yearly growth rate since 2014.

How a Strong Economy Can Slow the Housing Market

In 2018, the housing market has largely been a victim of the economy's success. The Federal Reserve is trying to keep inflation in check by increasing short-term interest rates and reducing their holdings of Treasury bonds and mortgage-backed securities. The Fed's moves have pressured mortgage rates higher and made buying a home more expensive. Meanwhile, the healthy economy and robust labor market in 2018 has supported home buyer demand.

Rising mortgage rates impact both housing supply and demand, limiting supply by reducing the propensity of sellers to sell and flattening demand by reducing consumer house-buying power. For home buyers, the only way to mitigate the loss of affordability caused by a higher mortgage rate is with an equivalent, if not greater, increase in household income.

The increase in mortgage rates since last October has reduced house-buying power by $41,000. Over the same period, household income growth increased consumer house-buying power by nearly $11,000. The net result is overall consumer house-buying power fell by $30,000 in October compared with a year ago. At the moment, rising mortgage rates are winning the buying power tug-of-war with rising household incomes — the pace of household income growth is not sufficient to fully offset the change in mortgage rates.

Do Rising Mortgage Rates Always Lead to Falling House Prices?

Increasing mortgage rates have been a defining feature of the 2018 housing market. Many people may expect house prices to decline when rates rise, but their effect on home prices may not be as straightforward as you think.

The graph below shows unadjusted house prices in seven rising mortgage rate eras over the past 25 years. that the trend is clear — house prices are resistant to rising mortgage rates. Apart from the 1993-94 rising-rate period, when house prices declined slightly and briefly, they have always ended the rising-rate era higher than when it started.

Chart: House Prices When Mortgage Rates Rise

In the longest rising mortgage rate era, 1998-2000, nominal house prices increased nearly 15 percent in just 19 months as the economy expanded rapidly. At the time, the economy was defined by tight labor markets and low inflation, all contributing to a healthy housing market.

Today, as mortgage rates increase, house prices are rising at a pace similar to the 1998-2000 era. Over the last 13 months, nominal house prices have increased by 8.0 percent. This compares to the first 13 months of the 1998-2000 rising mortgage-rate era, when house prices increased 8.4 percent.

Economic Environment More Influential than Mortgage Rates

The lesson? House prices are often resilient to rising mortgage rates, but just how resilient depends on the economic environment. Ultimately, rising interest rates are indicative of a growing economy, which benefits consumers and increases home buyer demand. The tug-of-war between rising mortgage rates and increasing household income doesn't necessarily mean that house prices will decline. In fact, history tells us otherwise.

Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 1.9 percent between September 2018 and October 2018, and declined 7.7 percent year over year.

While unadjusted house prices are now 2.3 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices are 37.9 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.