Affordability in real house prices rises in April

by Candyd Mendoza26 Jun 2019

Real house prices are now 15% less costly than nine years ago.

Real house prices inched down 0.9% in April and 0.72% year-over-year, according to the First American Real House Price Index (RHPI).

First American Chief Economist Mark Fleming said the increase might have something to do with consumer house-buying power gains.

“Despite the increasing rate of nominal house-price appreciation, which makes homes less affordable, the consumer house-buying power gains were strong enough to win the affordability tug-of-war,” said Fleming. “Indeed, the RHPI, which adjusts nominal house prices based on changes in income and interest rates, decreased 0.72% compared with one year ago. The last time real house prices declined was in October 2016.”

The gain in household income (2.7%) and consumer house-buying power (1.5%), together with lower mortgage rates (2.8%) all swung in favor of affordability in April.

 “When household income rises, consumer house-buying power increases,” Fleming said. “Declining mortgage rates have a similar impact on affordability, so in April home buyers received a double shot of house-buying power to jolt affordability in their favor nationally. Only nominal house price appreciation, which began to pick up the pace in April, dampened affordability. Declining mortgage rates have encouraged demand by increasing house-buying power. However, when demand increases for a scarce (limited or low supply) good, prices will rise faster. In April, the rate of year-over-year nominal house price appreciation increased to 5.9%, compared with 5.8% in March. “

Unadjusted house prices grew 2.8% from the housing boom peak in 2006 while real, house-buying power-adjusted house prices stayed 40.7% below their 2006 housing boom peak.

“While affordability improved nationally, real estate is all about ‘location, location, location.’ Of the 44 markets we track, affordability improved in 43 of them month-over-month, and affordability improved in 18 markets on a year-over-year basis,” said Fleming.

The five markets with the highest year-over-year growth in affordability are:

  • San Jose, Calif.
  • Seattle
  • Portland, Ore.
  • San Francisco
  • Los Angeles

“San Jose saw the greatest increase in affordability as house-buying power jumped by 6.9% due to the decline in mortgage rates and a 2.9% increase in household income compared with a year ago,” Fleming said. “Nominal house prices in San Jose also declined by 2.3% year-over-year, which further contributed to the 8.6% decline in real house prices. In Seattle, house-buying power increased by 8.8% due to a 4.7% increase in household income, which was more than enough to counter the 2% increase in nominal house prices compared with a year ago.”