The housing prices show no sign of falling. Yet, according to the Real House Price Index released by First American Financial Corporation (First American) on Monday, the home affordability crisis may be overstated for now.
According to the First American Real House Price Index analyzing the November 2017 data, homes were 5 percent more expensive compared to the same period a year before. Between October 2017 and November 2017, home prices increased 0.5 percent, while consumer house-buying power (how much one can buy based on changes in income and interest rates) remained unchanged on a month-over-month basis, but grew 0.9 percent year over year.
The report indicated that house prices were still 37.7 percent below their housing boom peak in July 2006 and 16.2 percent below the level of prices in January 2000. Unadjusted house prices increased 6 percent in November on a year-over-year basis and were 6.3 percent above the housing boom peak of 2007.
Despite these numbers, the issue of an affordability crisis may be overstated, according to Mark Fleming, Chief Economist at First American. “That nominal house prices are growing faster than household incomes is often used as the basis for arguing that we are facing an affordability crisis. It is true that unadjusted house prices grew faster than income between November 2016 and November 2017,” he said. However, “Homebuyers today have historically high levels of house-purchasing power and that’s one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is over-stated for now,” Fleming said.
The report indicated that consumer house-buying power was 2.3 times higher than it was in 2000. It was also only 2.9 percent below the peak in July 2016. Consumer house-buying power, based on changes in income and interest rates, was unchanged between October and November and actually improved by 1 percent, compared with a year ago. According to the report, a consumer’s house-buying power, how much one can afford to buy, is also based on changes in mortgage interest rates. Even if one’s income doesn’t change, but interest rates go down, house-buying power increases.
“Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power,” said Fleming.