Signs Point Toward Continued House Price Appreciation

Ahead of this morning’s S&P CoreLogic Case-Shiller Home Price Indexes, a report from First American Financial Corp., Santa Ana, Calif., said low mortgage rates, tight supply and demographic demand will continue to drive home price appreciation well into autumn.

“Mortgage rates are even lower (below 3% for the first time ever in July), supply is even tighter (record low inventory levels and going lower) and demographic demand continues as millennials age into their prime home-buying years and try to take advantage of low rates,” said First American Chief Economist Mark Fleming. “The growing demand against dwindling supply has worsened the supply and demand imbalance, which will continue to drive nominal house price appreciation.” 

The company’s monthly Real House Price Index reported real house prices decreased by 0.2 percent between May and June. Year over year, real house prices declined by 4.8 percent. Consumer house-buying power, defined as how much one can buy based on changes in income and interest rates, increased by 1.1 percent between May and June and increased 13.7 percent year over year.

The report noted median household income has increased 0.2 percent since May and 64 percent since January 2000. Real house prices are 22.4 percent less expensive than in January 2000. While unadjusted house prices are now 13.5 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 45 percent below their 2006 housing boom peak.

“While lower mortgage rates have boosted demand in a supply constrained market, putting upward pressure on nominal house price appreciation, the impact of the pandemic on the labor market has significantly impacted household income,” Fleming said. “Faster nominal house price appreciation and lower household income can erode, or even completely eliminate, the affordability boost from today’s record low mortgage rates. From June 2019 until April 2020, affordability was improving for all top markets as house-buying power outpaced house price appreciation. However, as the pandemic and its impacts linger, house-buying power is no longer winning the affordability tug-of-war against nominal house price appreciation in many markets.”

The Index increased in 35 of the 44 markets First American track year over year. Markets with the greatest year-over-year increases in the RHPI—and thus the greatest declines in affordability—were New York, San Diego, Pittsburgh, Orlando and St. Louis.

“Affordability declined the most year over year in New York City, where real house prices as measured by the RHPI increased by 29.3 percent,” Fleming said. “Nominal house prices increased by 7.6 percent, and house-buying power declined by 16.8 percent. Even though nominal house price appreciation in New York City was less than in some other cities, the big drop in house-buying power meant New York City saw the greatest annual decrease in affordability. Since the average 30-year, fixed mortgage rate in June is the same across cities, the decline in house-buying power was driven by a significant decrease in median household income. Nominal house price appreciation grew fastest in Pittsburgh and house-buying power fell as well, putting Pittsburgh third on the list for greatest annual decrease in affordability.” 

The report said states with the greatest year-over-year increase in the RHPI were Vermont (10.6 percent), New Mexico (10.3 percent), Montana (9.4 percent), Texas (8.8 percent), and Oklahoma (8.4 percent). States with the greatest year-over-year decrease in the RHPI were Louisiana (-10.1 percent), New Hampshire (-7.4 percent), West Virginia (-7.1 percent), New Jersey (-6.9 percent) and Pennsylvania (-4.6 percent).

Among metros tracked by First American, markets with the greatest year-over-year decrease in the RHPI were Las Vegas (-25.6 percent), Providence, R.I. (-13.7 percent), Cleveland (-5.8 percent), Chicago (-4.2 percent) and Boston (-3.4 percent).