First American: Housing Affordability Continues Improvement

First American Financial Corp., Santa Ana, Calif., said its Real House Price Index fell by 2.1 percent in July and by nearly 5 percent from a year ago, suggesting greater housing affordability and increased buying power.

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.

The report said real house prices declined on a year-over-year basis in 37 of the 43 metropolitan areas tracked by First American, as rising household incomes and low mortgage rates continue to foster growth in consumer house-buying power across of the majority of major metropolitan markets in July, which First American Chief Economist Mark Fleming were sufficient to more than offset unadjusted price appreciation,

Fleming said after adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom. He noted 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.

“Market price levels cannot be considered in isolation,” Fleming said. “The real price level must consider how income levels and interest rates influence the amount one can borrow.”

Fleming said the shortage of inventory listed for sale continues to be problematic, but gains in affordability are helping the market reach its potential for home sales. “A rise in estimated median household incomes is also playing a large role in certain key markets that otherwise seem expensive when just considering nominal house prices, and not factoring in the boost in buying power provided by increased income levels in those markets,” he said.

Other report highlights:
–States with the highest year-over-year increase in the Index were Wyoming (+2.5 percent), Michigan (+1.4 percent), Oregon (+0.3 percent) and Nevada (+0.1 percent).
–States with the highest year-over-year decrease were New Jersey (-9.3 percent), Iowa (-9.1 percent), Arkansas (-8.6 percent), Virginia (-8.5 percent) and Nebraska (-8.5 percent).
–Among the largest 50 metro areas, markets with the highest year-over-year increase were Jacksonville, Fla. (+5.7 percent), Tampa, Fla. (+3.3 percent), Charlotte, N.C. (+0.8 percent), Sacramento, Calif. (+0.8 percent) and Detroit (+0.3 percent).
–Markets with the highest year-over-year decrease were Virginia Beach, Va. (-8.6 percent), Washington D.C. (-7.2 percent), Cleveland (-6.8 percent), Oklahoma City (-6.7 percent) and San Francisco (-6.2 percent).

“U.S. mortgage rates have remained low due to the paradoxical impact of international economic instability, as investors flee to the relative safe-haven of the 10-year Treasury note, amongst other U.S. bonds, which, in turn, boosts affordability for U.S. home buyers,” Fleming said. “As potential home buyers continue to enjoy increased buying power driven by low rates and higher wages, we will all wait with [bated] breath for what the December FOMC meeting brings us.”