First American: Real House Prices Still Nearly 40% Below Housing Boom Peak

First American Financial Corp., Santa Ana, Calif., said real home prices remain “significantly” lower than before the housing boom–nearly 40 percent, according to the company’s Real House Price Index.

The Index measures 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 and across the United States at national, state and metropolitan area levels.

First American Chief Economist Mark Fleming said simply looking at house price changes without considering the changes in consumer house-buying power misrepresents the real change in prices. “After adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom,” he said.

For March, the RHPI was unchanged as compared with February and increased by 2.1 percent as compared to a year ago. The national RHPI is 18 percent lower than it was in January 2000.

“This indicates that houses, after adjusting for the substantial increase in consumer house-buying power due to the large decline in mortgage rates, are 18 percent more affordable than they were 15 years ago,” Fleming said. “In fact, on a consumer house-buying power adjusted basis, house prices are as affordable as they were in 1997, even though the unadjusted price level is 110 percent higher today than it was then. Even expensive markets like San Francisco are only just passing their 2000 consumer house-buying power adjusted price levels, illustrating the impact of rising incomes in San Francisco and falling rates nationally.”

This dichotomy can create misperceptions among home shoppers, Fleming said. “Many potential homebuyers this spring may experience sticker shock when house hunting, as unadjusted prices are consistently outpacing income growth,” he said. “Yet, the real price level is much lower than even in the years before the housing boom, largely because consumer house-buying power is significantly higher today due to the current environment of historically low mortgage rates.”

First American said states with the highest year-over-year increase were North Dakota (16.0 percent), Wyoming (14.7 percent), Rhode Island (12.2 percent), Delaware (6.0 percent) and Missouri (5.6 percent). States with the highest year-over-year decrease were the District of Columbia (-5.5 percent), Alaska (-5.2 percent), Maryland (-5.0 percent), Pennsylvania (-4.4 percent) and West Virginia (-4.2 percent).

Among largest 50 Core-Based Statistical Areas, markets with the highest year-over-year increase were Providence, R.I. (11.6 percent); Tampa. (8.8 percent); Denver (7.8 percent); Jacksonville, Fla. (7.2 percent); and Seattle (6.9 percent). Markets with the highest year-over-year decrease were Baltimore (-9.3 percent); Virginia Beach, Va. (-3.8 percent); Pittsburgh (-3.5 percent); Milwaukee (-2.5 percent); and Memphis, Tenn. (-2.0 percent).