Some recent reports have indicated that home price appreciation is outpacing wage gains, thus crimping affordability in the single-family housing market. One analysis found, however, that when house prices are adjusted, many major markets in the country are more affordable than prices would suggest.
First American Financial Corporation’s Real House Price Index (RHPI) for August 2016, released Tuesday, indicated that real house prices actually declined by 2.6 percent over-the-year and are still a distant 41 percent below their 2006 peak—and nearly 21 percent below their January 2000 level. The RHPI measures affordability of single-family properties in the U.S. when adjusted for impact of income and interest rate changes on consumer buying power.
“Contrary to popular opinion, housing isn’t getting more expensive. In fact, on a purchasing-power adjusted basis, housing is becoming more affordable,” said Mark Fleming, chief economist at First American. “Interest rate declines, combined with meaningful gains in incomes, have provided the consumer with greater buying power, which increases housing affordability. The growth in consumer house-buying power is actually outpacing the increases in nominal prices driven by remarkably tight inventories.”
A big reason for the year-over-year decline in the RHPI was the drop in mortgage rates—the average 30-year FRM was nearly 50 basis points lower in August 2016 compared with August 2015 (3.44 percent compared to 3.91 percent). When unadjusted, national house prices are only 1.7 below their pre-bust 2007 level.
“Until there is a meaningful increase in mortgage rates, likely starting later this year and continuing into 2017, real house price levels will remain low in most major markets,” Fleming said. “At the moment, affordability is actually increasing in more markets than it is decreasing, including San Francisco, San Jose, New York, Washington and Boston. The conventional wisdom that these markets are over-valued does not account for the meaningful growth in consumer house-buying power across the majority of major metropolitan markets.”
The markets with the highest rate of improved affordability were Virginia Beach, Oklahoma City, San Francisco, and Milwaukee; each of those markets experienced a year-over-year decline of 4 percent or more in the RHPIs for those markets. Over-the-year, real house prices declined in 32 of the 43 metros First American tracks due to wage increases and low mortgage rates offsetting the unadjusted price appreciation.