First American Financial Corporation released the July 2023 First American Real House Price Index (RHPI), which 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.
In a recent report, Mark Fleming, Chief Economist at First American, details how lower nominal house prices, lower mortgage rates, higher incomes, or some combination of the three are the only ways to bring more affordability to the housing market.
National Findings for July 2023:
Chief Economist Analysis: RHPI Rises 17% Year-Over-Year
“In July 2023, the Real House Price Index (RHPI) jumped up by nearly 17% on an annual basis, bringing housing affordability to the lowest point in over three decades. Two factors drove the sharp annual decline in affordability: a 4% annual increase in nominal house prices and a 1.4 percentage point increase in the 30-year fixed mortgage rate compared with one year ago,” said Mark Fleming, Chief Economist at First American. “For homebuyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income. Even though household income increased 3.7% since July 2022 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices.
“The median sale price of an existing home in July, according to data from First American Data & Analytics, was approximately $345,000, while the median house-buying power was nearly $337,000. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home,” Fleming continued. “While the national housing market is overvalued by this measure, applying the same analysis at the market level confirms how different housing market dynamics can be from one market to the next.”
Where is Housing Overvalued?
“Of the top 50 markets tracked, 24 markets were overvalued in July, meaning the median existing-home sale price exceeded house-buying power. This is significantly higher than in July 2022, when just 15 markets were considered overvalued,” said Fleming. “The most overvalued market in July was San Jose, CA, where the median sale price of a home was nearly $1,440,000, approximately double the level of consumer house-buying power of $700,000. Moving down the overvaluation list, San Francisco and Los Angeles were also overvalued, although to a lesser extent. While house prices had been declining from last year’s peak in these markets, they have since re-accelerated. Despite being considered overvalued, the housing supply shortage is preventing prices from adjusting downward to reflect current affordability levels.
Where Does the Housing Market Go from Here?
“Housing overvaluation is a function of three factors: nominal house prices, household income, and mortgage rates. First American Data & Analytics preliminary nominal house price index indicates that house price appreciation likely continued in August. Meanwhile, median household incomes are expected to continue to rise, as the supply and demand imbalance in the labor market persists, putting upward pressure on wages. Finally, while mortgage rates may fluctuate, they are generally expected to stabilize, if the Federal Reserve signals a pause in rate hikes is near,” said Fleming. “The outlook for affordability will depend on the tug-of-war between these factors. Lower nominal house prices, lower mortgage rates, higher incomes, or some combination of the three are the only ways to bring more affordability to the housing market.”
July 2023 Real House Price Index Highlights
- Real house prices increased 2.0% between June 2023 and July 2023.
- Real house prices increased 16.9% between July 2022 and July 2023.
- Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 1.0% between June 2023 and July 2023, and decreased 11.0% year-over-year.
- Median household income has increased 3.7% since July 2022 and 83.2% since January 2000.
- Real house prices are 43.9% more expensive than in January 2000.
- Unadjusted house prices are now 53.7% above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 0.7% above their 2006 housing boom peak.
July 2023 Real House Price State Highlights
- The five states with the greatest year-over-year increase in the RHPI are: Maine (+27.8%), Connecticut (+27.0%), Indiana (+25.3%), Alaska (+24.6%), and Virginia (+23.9%).
- There were no states with a year-over-year decrease in the RHPI.
July 2023 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Indianapolis (+25.2%), Chicago (+25.2%), San Diego (+25.2%), Buffalo, NY (+24.6%), and Miami (+24.5%).
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.
“The good news is that most of the markets we track remain undervalued by this measure, and some markets remain significantly undervalued,” said Fleming. “For example, Detroit, Philadelphia, and Cleveland are undervalued by an average of $126,000.”
The next release of the First American Real House Price Index will take place the week of October 30, 2023 for July 2023 data.
To read the full report, including more data, charts, and methodology, click here.