Are Price Gains Really Hampering Affordability?

While home prices have been on the rise now for a few years (increasing year-over-year by 6.3 percent in 2015, according to CoreLogic), when other factors are considered, such as income levels and interest rates, houses are becoming more affordable in many markets.

According to First American Financial Services’ Real House Price Index (RHPI) for July 2016 released Monday, real house prices declined in 37 out of 43 markets tracked by First American.

“[R]ising household incomes and low mortgage rates continue to foster meaningful growth in consumer house-buying power across of the majority of major metropolitan markets in July, which were sufficient to more than offset unadjusted price appreciation,” said First American chief economist Mark Fleming. “Market price levels cannot be considered in isolation. The real price level must consider how income levels and interest rates influence the amount one can borrow.”

The RHPI declined over-the-month by 2.1 percent and over-the-year by 4.8 percent in July even though unadjusted, house prices are expected to appreciate by 5 percent over-the-year during the month.

“After adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom,” Fleming said. “Real house prices are 39.7 percent below their housing-boom peak in July 2006 and 21.5 percent below the level of prices in January 2000. Unadjusted, the national price level is 2.3 percent away from the housing-boom peak in 2007.”

While widely reported ongoing inventory issues have been problematic, the gains in affordability are helping the market reach its potential for home sales, according to First American. Income gains are also assisting affordability in markets that seem expensive when considering nominal house prices.

“Again this month, increases in estimated median household incomes in both Washington D.C. and San Francisco, markets conventionally considered unaffordable, were enough to offset unadjusted price gains and bring meaningful affordability improvements in real terms to both markets,” Fleming said.

Homebuyers are also expected to benefit from the Fed’s recent decision to hold the federal funds target rate at its current level of one quarter to one half percent. Since the Fed’s historic liftoff last December which raised the rate to that level, mortgage rates have plummeted down near record lows.

“International economic instability and lower than target core inflation gave the FOMC pause this week as they decided to hold the federal funds rate steady in their September meeting,” Fleming said. “The continued low rates will only be a positive to U.S. home buyers. Low rates combined with meaningful gains in wages brings greater buying power and housing affordability.”