First American: Affordability Crisis ‘Overstated’

Defying conventional views about the housing market, First American Financial Corp., Santa Ana, Calif., says home buyers today have historically high levels of house-purchasing power–an important reason why talk of an affordability crisis is “overstated” for now.

The company’s November Real House Price Index, which 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 at national, state and metropolitan area levels, said “real” house prices increased by 0.5 percent between October and November and by 5.0 percent year over year.

The report said consumer house-buying power–how much one can buy based on changes in income and interest rates–remained unchanged between October and November and grew by 0.9 percent year over year. First American said real house prices are 37.7 percent below their housing boom peak in July 2006 and 16.2 percent below the level of prices in January 2000.

First American Chief Economist Mark Fleming said because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability. And that, Fleming said, is why the perceived affordability “crisis” really “isn’t.”

“That nominal house prices are growing faster than household incomes is often used as the basis for arguing that we are facing an affordability crisis,” Fleming said. “Yet, overlooked in the comparison of income growth and unadjusted house price growth is that a change in household income is not the only factor that influences how much home one can afford to buy.”

A consumer’s house-buying power, how much one can afford to buy, is also based on changes in mortgage interest rates, Fleming said. “Even if one’s income doesn’t change, but interest rates go down, house-buying power increases,” he said. “Consumer house-buying power, based on changes in income and interest rates, was unchanged between October and November and actually improved by 1 percent, compared with a year ago.”

Fleming said consumer house-buying power is 2.3 times higher than it was in 2000 and only 2.9 percent below the peak in July 2016. “Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power,” he said. “Home buyers today have historically high levels of house-purchasing power and that’s one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is over-stated for now.”

The report said states with the greatest year-over-year increase in the index are Delaware (+12.4 percent), Nevada (+10.7 percent), Missouri (+10.6 percent), New York (+8.6 percent) and Washington (+8.3 percent). States with the smallest year-over-year increase are Arkansas (-2.9 percent), Maryland (-1.5 percent), Washington, D.C. (-0.5 percent), Alabama (+0.5 percent) and Oklahoma (+1.3 percent).

Among metros tracked by First American, markets with the greatest year-over-year increase in the RHPI are San Jose, Calif. (+14.0 percent), Las Vegas (+13.6 percent), Seattle (+10.7 percent), Columbus, Ohio (+10.2 percent) and Jacksonville, Fla. (+10.1 percent). Markets with the smallest year-over-year increase are Pittsburgh (-2.5 percent), Austin, Texas (+1.3 percent), Riverside, Calif. (+1.5 percent), Memphis, Tenn. (+2.6 percent) and Cincinnati. (+2.8 percent).