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Homebuying Power Outpaces Price Appreciation

First American Financial Corporation’s latest Real House Price Index (RHPI) for December 2020 found that real house prices increased 0.5% between November 2020 and December 2020, with a 7.2% year-over-year decline over December 2019.

Consumer homebuying power, which measures how much one can buy based on changes in income and interest rates, increased 1.1% between November 2020 and December 2020, and increased 21.1% year-over-year. Since December 2019, the median household income has increased 6.2% and 72.9% since January 2000.

“The housing market today is not the same as the housing market during the bubble years,” said Mark Fleming, Chief Economist at First American. “Most importantly, today’s housing market is not overvalued. Considering only the nominal level of house prices is not sufficient to determine whether the market is overvalued or not. Lower mortgage interest rates and rising incomes correspond with higher house prices as homebuyers can afford to borrow and buy more. If housing is appropriately valued, housebuying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded housebuying power in 2006 nationally, but today housebuying power is nearly twice as high as the median sale price nationally. Of course, real estate is local and not all markets are created equal.”

According to First American’s RHPI, real house prices are 26.3% less expensive than in January of 2000. While unadjusted house prices are now 20.7% above the housing boom peak in 2006, real, housebuying power-adjusted house prices remain 48.2% below their 2006 housing boom peak.

Regionally, the only state with a year-over-year increase in the RHPI was Wyoming at +1.1%. The five states with the greatest year-over-year decrease in the RHPI were California at -10.4%, Louisiana at -10.1%, Massachusetts at -9.6%, New York at -9.0%, and Illinois at -8.2%.

“Of the top 50 markets tracked, only three markets, all located in California, were overvalued, meaning the median existing-home sale price exceeded housebuying power, in December,” said Fleming. “The market with the highest overvaluation was Los Angeles, where the median consumer housebuying power in December was just over $590,000, significantly below the median sale price of a home at approximately $729,000. San Francisco and San Jose were also overvalued, although to a lesser extent. However, all three overvalued markets are still significantly less overvalued than during the national housing boom peak in March 2006. Los Angeles, for example, was overvalued by approximately $286,000 in 2006, more than twice what it is today.”

About Author: Eric Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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