{"id":468322,"date":"2021-03-31T07:03:24","date_gmt":"2021-03-31T11:03:24","guid":{"rendered":"http:\/\/www.marketnewsdesk.com\/?p=468322"},"modified":"2021-03-31T07:03:24","modified_gmt":"2021-03-31T11:03:24","slug":"affordability-improved-amid-soaring-nominal-house-prices-according-to-first-american-real-house-price-index","status":"publish","type":"post","link":"https:\/\/www.marketnewsdesk.com\/index.php\/affordability-improved-amid-soaring-nominal-house-prices-according-to-first-american-real-house-price-index\/","title":{"rendered":"Affordability Improved Amid Soaring Nominal House Prices, According to First American Real House Price Index"},"content":{"rendered":"

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Affordability Improved Amid Soaring Nominal House Prices, According to First American Real House Price Index<\/b><\/p>\n

\u2014Nominal house prices increased over 13 percent on a year-over-year basis, but house-buying power has grown even faster, increasing by an amazing 19 percent year over year, says Chief Economist Mark Fleming\u2014<\/i><\/b><\/p>\n

SANTA ANA, Calif.–(BUSINESS WIRE<\/a>)–First American Financial Corporation<\/a> (NYSE: FAF), <\/b>a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the January 2021 First American Real House Price Index (RHPI)<\/a>. 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.\n<\/p>\n

Chief Economist Analysis: Soaring Nominal House Prices Don\u2019t Tell Affordability Story <\/b><\/p>\n

\n\u201cSoaring nominal house prices dominate recent headlines and for good reason. It is true that nominal house prices are the highest they have ever been, over 22 percent higher than the housing boom peak in 2006, according to the First American Data & Analytics House Price Index,\u201d said Mark Fleming, chief economist at First American. \u201cThe acceleration in the pace of annual house price growth began in the summer months of 2020, as potential home buyers emerged from lockdowns armed with record low mortgage rates and were met by historically low housing supply \u2013 a perfect storm for rapid nominal house price appreciation.\n<\/p>\n

\n\u201cBy conventional measures of affordability, especially in an environment of modestly rising (in some markets declining) household income, a surge in nominal house prices implies significantly reduced affordability,\u201d said Fleming. \u201cYet, nominal house price fluctuations alone, or even the relationship between nominal house price growth and income growth, can be a misleading indicator of affordability, and overlooks what matters more to potential buyers \u2013 house-buying power — how much home one can buy based on changes in income and interest rates.\n<\/p>\n

\n\u201cFor example, let\u2019s assume you earn $100,000 a year, have a 33 percent debt-to-income ratio, and put down 5 percent on a home. With a 4 percent mortgage rate, your house-buying power is $606,000. But, if rates fell to 3 percent, your house-buying power increases by $80,000. Our Real House Price Index (RHPI)<\/a> adjusts nominal house prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow,\u201d said Fleming. \u201cThe ability of low or declining interest rates to boost house-buying power makes it possible for a housing market to have high or even rising nominal house prices yet remain highly affordable (as measured by the RHPI) and vice versa. Indeed, a walk down house price memory lane shows us that nominal house prices alone are not always a good measure of affordability.\u201d\n<\/p>\n

The 90s Recovery: Low House Prices, Low affordability<\/b><\/p>\n

\n\u201cIn the chart<\/a>, nationwide nominal house prices, real house prices, and house-buying power are all indexed to January 1990. From October 1993 through December 1994, a period when the U.S. economy was recovering from the early 1990s recession, housing was considered relatively unaffordable, even though nominal house prices were barely rising (1.0 percent),\u201d said Fleming. \u201cDespite relatively flat nominal house prices, the RHPI increased over 20 percent during this time period because house-buying power fell by 16 percent due to rising mortgage rates. Even though nominal house price growth was low, that was not enough to call the market \u2018affordable\u2019 since it was accompanied by declining house-buying power and declining affordability.\u201d\n<\/p>\n

The Housing Boom Era: High House Prices, Low Affordability<\/b><\/p>\n

\n\u201cNominal house prices surged in 2005 and peaked in 2006. From January 2005 through March 2006, nominal house prices jumped nearly 13 percent, while mortgage rates remained relatively steady. During this time, the RHPI also increased dramatically by nearly 15 percent, indicating significantly reduced affordability,\u201d said Fleming. \u201cThe reason? Nominal house price appreciation far outpaced house-buying power. During the housing boom era, rising nominal house prices did signal falling affordability, but only because house-buying power did not keep up.\u201d\n<\/p>\n

The Pandemic Era: High House Prices, High Affordability<\/b><\/p>\n

\n\u201cIn the most recent RHPI report reflecting January 2021 data, nominal house prices increased over 13 percent on a year-over-year basis, but house-buying power has grown even faster, increasing by an amazing 19 percent year over year. The result? Despite rapidly rising nominal house prices, affordability actually improved, with the RHPI falling nearly 5 percent during the same time period,\u201d said Fleming. \u201cIn fact, while nominal house prices are now more than 22 percent above the housing boom peak in 2006, real, house-buying power-adjusted, prices are 48 percent below their 2006 housing boom peak. The lesson? In housing, you can\u2019t judge a housing market \u2018book\u2019 by its nominal house price \u2018cover.\u2019 Affordability is dependent on house-buying power.\u201d\n<\/p>\n

Will Rising Mortgage Rates Signal the End of an Affordable Era?<\/b><\/p>\n

\n\u201cRecently, mortgages rates have increased modestly. Does this spell the end of an affordable era? Not quite. As rates rise, affordability may become an issue for some buyers on the margin. As these buyers pull back from the market and sellers adjust their expectations, house price appreciation will adjust,\u201d said Fleming. \u201cBut, the improving economic conditions and the ongoing shortage of supply relative to demand continue to support house price growth. The underlying fundamental housing market conditions support a moderation of house price appreciation which, alongside a healthier labor market and still historically low mortgage rates, should keep housing affordable.\u201d\n<\/p>\n

January 2021 Real House Price Index Highlights<\/b><\/p>\n