Defining ‘Home Price’

“There are three kinds of lies: lies; damned lies; and statistics.”
–Mark Twain.

Home prices are what they are. Except, of course, when they are not.

Over the past year, as the housing market has largely recovered from the Great Recession, much has been made over home prices. Most indicators suggest that home prices have now exceeded their pre-Recession peaks and continue to push toward record highs.

However, another school of thought revolves around “actual” home prices and “real” home prices. Last year, First American Financial Corp., Santa Ana, Calif., introduced its Real House Price Index, 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 and across the United States at national, state and metropolitan area levels.

First American Chief Economist Mark Fleming said because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

In June, the company’s monthly Real House Price Index reported real house prices increased by 0.7 percent between February and March and by 11.5 percent year-over-year. Consumer house-buying power–how much one can buy based on changes in income and the interest rate–decreased by 0.4 percent between February and March and fell by 5.2 percent year-over-year.

Furthermore, the report said real house prices remain 32.5 percent below their housing-boom peak in July 2006 and 9.3 percent below the level of prices in January 2000.

So in essence, First American says, despite record-high home prices, they are in reality nearly one-third below what they could be. “Real, purchasing-power adjusted house prices are rising even faster than unadjusted home prices alone, primarily due to declining consumer purchasing power,” Fleming said. “

In another report, the Joint Center for Housing Studies at Harvard University questioned whether home prices are really above their pre-recession peak.

The article ( by Alexander Hermann, research assistant with the Joint Center, noted while in 2016, national home prices not only rose for the fifth year in a row, when adjusted for inflation, home prices were still 9 to 16 percent below peak, depending on the measure used.

Using data from the Joint Center’s recent State of the Nation’s Housing report, Hermann said data indicate nominal home prices were above their mid-2000s heights in 48 percent of 454 markets (454 total). These markets were largely concentrated in the middle of the country, the Pacific Northwest and Texas. However, in real dollars, prices reached their peaks in only 138 (15 percent) of all markets.

Furthermore, the Joint Center said, while prices were above peak in only 10 percent of Metropolitan Statistical Areas and Metropolitan Divisions, they topped their peak in 17 percent of the smaller micro areas, which experienced less home price volatility over the last decade. In contrast, real prices were still 20 percent below peak in nearly one-third of all markets, most located in areas hardest hit by the housing crisis, including Florida and large parts of the Southwest, Northeast and parts of the Midwest.

Hermann cited “notable differences” in long-term patterns in areas where real prices remained well below their pre-recession peak. “In many markets on both coasts–such as Miami, Washington, D.C. and Sacramento–prices have risen significantly over the last several years and, in real terms, are now well above their levels in 2000,” he said. “However, because prices in these areas rose significantly during the boom years and fell so sharply during the recession, the recent gains have left prices far below what they were in the mid-2000s.”

In contrast, Hermann noted, in some Midwestern and Southern markets, such as Detroit, Chicago and Montgomery, Ala., prices rose only modestly in the 2000s, dropped significantly during the recession, and have grown only slightly in recent years. “Consequently, real prices in these areas were not only well below their peak levels from the mid-2000s, but remained below 2000 levels in many cases,” he said.

The Joint Center report said uneven growth in home prices over the past two decades has led to increasing differences in housing costs. For example, in 2000 the inflation-adjusted median home value in the 10 most expensive metros (of the country’s 100 largest metros) was $350,000, nearly three times higher than the median value of homes in the 10 least expensive metros. But between January 2000 and December 2016, real home values in the ten highest-cost housing markets rose by 64 percent to about $574,000, more than five times the value of homes in the least expensive areas, which grew by only 3 percent, to $113,000.

A broader look at home prices further highlights these stark disparities, the report said. Nationally, real home prices rose by 32 percent between 2000 and 2016. But home prices in 30 percent of markets (290 total) actually declined in real terms, including 28 percent of metro and 33 percent of micro areas, most of them in the Midwest and South. In the Detroit metro area, home prices declined 26 percent, the largest decrease among large metros. Prices also fell significantly in the Cleveland (22 percent decline), Memphis (15 percent decline), and Indianapolis (13 percent decline) markets.

At the opposite end of the spectrum, the Joint Center said between 2000 and 2016 real median home prices rose by more than 40 percent in 153 markets (16 percent), most of them on the East and West Coasts. In fact, prices doubled in 12 markets, including the Honolulu metro areas, which saw 104 percent growth. Home prices also rose considerably in the Los Angeles (97 percent), San Francisco (84 percent), Miami (73 percent), and Washington, DC (62 percent) markets. While micro areas were more likely to be past their previous peak, the lower price volatility also meant they experienced less price growth since 2000, with only 12 percent of micros exceeding 40 percent growth.

So…depending on how you look at home prices, we’re either breaking records as we speak or on the verge of doing so, if only home prices were “real.”