First American: Real house prices nowhere near historical peak

House-buying power remains near historic highs despite continued house price gains

First American: Real house prices nowhere near historical peak

While house prices have seen rapid increases due to the imbalance of growing demand and decreasing supply, trends actually show that consumer house-buying power has increased to outpace price growth, according to the Real House Price Index (RHPI) released by First American Financial for April.

The index revealed that real house prices increased 0.5% between March and April and jumped 8.8% year over year. Meanwhile, consumer house-buying power, or how much one can buy based on changes in income and interest rates, slipped 0.1% month over month and declined 2.1% compared to March 2017. Because the index adjusts for house-buying power, it also serves as a measure of housing affordability.

First American Chief Economist Mark Fleming said increases in household incomes, mortgage rates, and unadjusted house price drove the year-over-year increase in the RHPI, indicating a significant drop in affordability. Household income grew 2.9% year over year, as mortgage rates grew by 6.6%. The unadjusted house price index increased by 10.4%.

“Unadjusted house prices are 9.2% above the housing boom peak in 2007, and have been on the rise since the end of 2011, nearly a seven-year run,” Fleming said. “But consumer house-buying power has increased by more than five times as much – 51% – since the housing boom peak in 2007 and is up 16% since the end of 2011.”

“House-buying power, how much one can buy based on changes in income and interest rates, has benefited in recent years from a decline in mortgage rates and the more recent slow, but steady, growth of household income,” he added. “Between the peak of unadjusted house prices in 2007 and this April, the 30-year, fixed-rate mortgage has fallen from 6.29% to 4.47%. Over the same period, household income has increased 23.7%. Lower mortgage rates and higher income levels mean consumers have significantly higher house-buying power today than they did in 2007.”

 

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