—If household income growth slows and house prices continue to rise, even today’s record low mortgage rates may not keep affordability from declining, says Chief Economist Mark Fleming—
SANTA ANA, Calif.–(BUSINESS WIRE)–First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the April 2020 First American Real House Price Index (RHPI). 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. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
Chief Economist Analysis: Pandemic Impact to Housing May Have Peaked in April
“The economic fallout and impacts to the housing market from the pandemic appeared to peak in April. The number of existing-home sales fell 18 percent relative to March, housing starts fell 26 percent, and the supply of homes available for sale approached record lows,” said Mark Fleming, chief economist at First American. “While historically low mortgage rates made it more affordable for those with stable incomes to buy a home, tightening credit standards and limited supply of homes for sale made it more difficult for some to obtain financing and find the home they want.”
Distorted Household Income Data
“The RHPI this month reflects a steep increase in wages in April, which is not an accurate portrayal of how the pandemic has impacted income levels across the country. The Labor Department reported that average hourly earnings in the private sector were up 8.0 percent in April compared with one year ago. The pandemic driven-economic crisis has hit low-wage workers hardest,” said Fleming. “When the lowest earners get laid off, they’re removed from the data that the government uses to calculate earnings, causing average hourly earnings to increase.
“This month’s estimate does not reflect actual household income levels in April, and therefore, house-buying power and the RHPI reflect a more positive picture than actually exists,” said Fleming. “However, we can examine some potential scenarios that can provide perspective on how the drivers of the Real House Price Index impact affordability.”
Interplay Between Rates, Income, and Nominal House Prices Drive Affordability Trends
“Three driving forces – mortgage rates, household income, and unadjusted house prices – influence affordability in the housing market. In 2019 and into early 2020, affordability was improving as rising household income and falling mortgage rates boosted house-buying power, which offset the impact of rising nominal house price appreciation,” said Fleming. “In April, mortgage rates fell and house price appreciation continued to rise, but the artificial increase in average household income distorted the measure of affordability. Let’s examine the potential impact to affordability in two possible scenarios – if household income remained the same month over month in April and if household income declined 1 percent month over month in April.”
Scenario 1: No Change to Household Income
“If the average household income remained the same in April as it was in March (no growth), house-buying power would still have increased by nearly $8,000 compared with March, simply because the 30-year, fixed-rate mortgage declined 0.14 percentage points,” said Fleming. “In this scenario, where household income remained the same as the previous month, the RHPI still indicates nearly a 1 percent increase in affordability relative to March, even after accounting for the accelerating nominal house price appreciation in April.”
Scenario 2: Household Income Declines 1 Percent
“However, if the average household income in April fell one percent compared with the previous month (from $67,130 to $66,460), house-buying power would still be $3,500 higher than March due to low rates. But, the modest increase in house-buying power in this scenario is not enough to offset the nominal house price appreciation and affordability falls by 0.08 percent, according to the RHPI,” said Fleming. “It’s clear that the delicate interplay between income, rates and nominal house prices determines the outcome for affordability.”
Summer May Bring Declining Affordability
“The question on everyone’s mind is what will happen to house prices and affordability in the near-term? In May and into June, mortgage rates have continued to fall, even reaching a historical low of 3.13 percent. Consensus among expert forecasts expect the 30-year, fixed-rate mortgage will average around 3.2 percent for the remainder of the year – good news for potential home buyers,” said Fleming. “However, our preliminary nominal house price index for the month of May indicates increasing house price appreciation, (7.9 percent year-over-year compared with 7.1 percent in April), as pent-up demand from a spring home-buying season frozen by pandemic-related stay-at-home orders melts into the summer and is met with near record low inventory.”
“Our research has also found that in past recessions, house prices show their ‘downside stickiness,’ meaning they remain flat or their growth slows during economic downturns, but often do not decline much. Because of this, in the near term, we anticipate nominal house price appreciation to accelerate this summer,” said Fleming. “Additionally, the May Employment Situation Summary points to a decline in average hourly wages, likely resulting in falling average household income. If household income growth slows and house prices continue to rise, even today’s record low mortgage rates may not keep affordability from declining.”
April 2020 Real House Price Index*
- Real house prices decreased 5.3 percent between March 2020 and April 2020.
- Real house prices declined 9.7 percent between April 2019 and April 2020.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 6.5 percent between March 2020 and April 2020, and increased 18.7 percent year over year.
- Median household income has increased 7.1 percent since April 2019 and 67.2 percent since January 2000.
- Real house prices are 23.5 percent less expensive than in January 2000.
- While unadjusted house prices are now 12.0 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 45.6 percent below their 2006 housing boom peak.
*NOTE: This month’s report reflects a steep increase in wages in April. The Labor Department reported that average hourly earnings in the private sector were up 8.0 percent in April compared with one year ago. The pandemic-driven economic crisis has hit low-wage workers hardest, and when the lowest earners get laid off, they’re removed from the data that the government uses to calculate earnings, causing the average to increase. This month’s estimate does not reflect actual household income levels in April, and therefore, house-buying power and the RHPI this month reflect a more positive picture than likely exists.
April 2020 Real House Price State Highlights
- The two states with a year-over-year increase in the RHPI are: Vermont (+1.3 percent) and Oklahoma (+0.5 percent).
- The five states with the greatest year-over-year decrease in the RHPI are: New Hampshire (-9.3 percent), Louisiana (-9.3 percent), South Dakota (-8.1 percent), Illinois (-7.8 percent), and Minnesota (-7.8 percent).
April 2020 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: New York (+3.0 percent), Pittsburgh (+2.2 percent), Columbus, Ohio (+2.1 percent), San Diego (+1.8 percent), and Milwaukee (+1.3 percent).
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year decrease in the RHPI are: Las Vegas (-20.4 percent), Providence, R.I. (-10.2 percent), San Francisco (-9.2 percent), Boston (-8.8 percent), and Portland, Ore. (-8.8 percent).
The next release of the First American Real House Price Index will take place the week of July 27, 2020 for April 2020 data.
The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2020 by First American. Information from this page may be used with proper attribution.
About First American
First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; banking, trust and wealth management services; and other related products and services. With total revenue of $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2020, First American was named to the Fortune 100 Best Companies to Work For® list for the fifth consecutive year. More information about the company can be found at www.firstam.com.
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