First American: House Price Appreciation at ‘Tipping Point?’

First American Financial Corp., Santa Ana, Calif., said its Real House Price Index showed home prices decreased by 1.6 percent from January to February and by 5.8 percent from a year ago.

The RHPI 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.

The report said consumer house-buying power, how much one can buy based on changes in income and interest rates, increased by 2.5 percent between January and February and increased by 14.6 percent year over year. It said median household income has increased by 2.7 percent since February 2019 and 60.0 percent since January 2000. Real house prices are 19.8 percent less expensive than in January 2000.

First American Chief Economist Mark Fleming said while unadjusted house prices are now 10.3 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 42.8 percent below their 2006 housing boom peak.

“As the coronavirus outbreak continues to affect the domestic and global economy, the housing market has shown that it is not immune to its impact,” Fleming said. “While mortgage rates have fallen due to the current economic uncertainty, stay-at-home orders have made it more difficult for potential home buyers to take advantage of the affordability boost, and first-time home buyers may have an even more difficult time as lenders have tightened credit availability. Despite all of the headwinds, homes continue to be bought and sold.”

Fleming said the “downside stickiness” of house prices is unique because typically aggregate demand shocks put a lot of downward pressure on the prices of goods and services, but in the housing market, sellers often withdraw supply rather than sell at lower prices. “This dynamic played out in March, as the supply of homes for sale declined by 10.2 percent compared with one year ago,” he said. “House prices declined in the 2008-2009 recession because homes were overvalued, mortgages were riskier and many homeowners had little equity, which resulted in a dramatic increase of foreclosures and distressed selling. Today’s housing market is fundamentally different.

As buyers and sellers pull back from the market and some sellers adjust their price expectations, “it’s reasonable to expect a reduction in home sales and a moderation in house price appreciation in this year’s spring home-buying season,” Fleming said. “Yet, transactions will continue to occur. The housing market may be down, but it may be better positioned than many believe.”

The report said the only state with a year-over-year increase is New Jersey (1.5 percent). States with the greatest year-over-year decrease were Hawaii (-8.7 percent), New Mexico (-8.6 percent), Colorado (-8.5 percent), California (-8.2 percent) and Utah (-8.0 percent).

Among metros tracked by First American, markets with a year-over-year increase in the RHPI were Cleveland (0.4 percent) and Milwaukee (0.3 percent). Markets with the greatest year-over-year decrease were San Francisco (-10.8 percent), Denver (-9.5 percent), Las Vegas (-9.4 percent), Riverside, Calif. (-9.1 percent) and San Jose, Calif. (-8.9 percent).