Five Cities Where Affordability Improved the Most, According to First American Real House Price Index

—Rising house-buying power has been strong enough to overcome the pace of nominal house price appreciation, 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 November 2019 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.

November 2019 Real House Price Index

• Real house prices increased 1.2 percent between October 2019 and November 2019.
• Real house prices declined 8.1 percent between November 2018 and November 2019.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.2 percent between October 2019 and November 2019, and increased 17.9 percent year over year.
• Median household income has increased 2.6 percent since November 2018 and 58.1 percent since January 2000.
• Real house prices are 16.7 percent less expensive than in January 2000.
• While unadjusted house prices are now 10.0 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 40.7 percent below their 2006 housing boom peak.

Chief Economist Analysis: Consumer House-Buying Power Up 17.9 Percent Year Over Year

“Once again, home buyers benefitted from a year-over-year affordability boost as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of increased affordability in November,” said Mark Fleming, chief economist at First American. “Compared with November 2018, the 30-year, fixed-rate mortgage fell by 1.2 percentage points and household income increased 2.6 percent. Both trends, rising household income and declining mortgage rates, boost consumer house-buying power.

“However, increased house-buying power also drives demand, and rising demand in a supply constrained market results in faster nominal house price appreciation,” said Fleming. “This is exactly what occurred in November, as the final component of the RHPI, nominal house prices, continued to accelerate, offsetting some of the affordability tailwind from rising house-buying power.

“Even as nominal house prices have gained momentum because of the supply and demand imbalance, real house prices actually declined by 8.1 percent thanks to the benefit of increased buying power,” said Fleming. “Since we know real estate is local, house-buying power and nominal house price gains vary by city, begging the question, where did affordability increase the most?”

The Five Cities Where Affordability Increased the Most

“Affordability improved year over year in each of the 44 markets we track,” said Fleming. “Below are the five markets with the greatest year-over-year growth in affordability.”

1. San Jose, Calif.
2. Baltimore
3. Riverside, Calif.
4. San Francisco
5. Denver

“Declining mortgage rates increase affordability equally in each market, as mortgage rates are generally the same across the country. However, household income growth and nominal house prices vary by market, so the affordability dynamic varies as well,” said Fleming. “In November, San Jose had the greatest year-over-year increase in affordability, mostly due to slower nominal house price appreciation compared with the other markets. Baltimore had slightly higher nominal house price appreciation compared with Riverside, 5.2 percent and 5.8 percent respectively, but outpaced Riverside when it came to house-buying power, growing by 22 percent versus Riverside’s 21 percent.

“Finally, the intricate dance between house-buying power and nominal house price appreciation becomes clear when comparing the cities taking the final top spots: San Francisco and Denver,” said Fleming. “The improvement in affordability in San Francisco was slightly greater than Denver due to slower nominal house price appreciation (3.0 percent versus Denver’s 4.2 percent), even though house-buying power in Denver outpaced San Francisco by 0.6 percentage points.”

Increased Affordability Drives Demand

“Nominal house price indices overlook what matters most to potential buyers – their purchasing power, or how much they can afford to buy. Rising house-buying power due to lower mortgage rates and strong income growth boosts affordability and drives demand,” said Fleming. “However, when demand increases for a scarce good, such as housing, prices will rise faster.

“The net effect of these dynamics will determine the trend in affordability in 2020, and thereby impact home-buyer demand,” said Fleming. “So far, rising house-buying power has been strong enough to overcome the pace of nominal house price appreciation nationally and in all top markets relative to last year, but that could change.”

November Real House Price State Highlights

• There are no states with a year-over-year increase in the RHPI.
• The five states with the greatest year-over-year decrease in the RHPI are: New Mexico (-12.9 percent), California (-12.2 percent), Utah (-11.9 percent), Nebraska (-11.5 percent), and Mississippi (-11.4 percent).

November 2019 Real House Price Local Market Highlights

• Among the Core Based Statistical Areas (CBSAs) tracked by First American, there are no markets with a year-over-year increase in the RHPI.
• 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: San Jose, Calif. (-14.7 percent), Baltimore (-13.7 percent), Riverside, Calif. (-12.7 percent), San Francisco (-12.6 percent), and Denver (-12.0 percent).

Next Release

The next release of the First American Real House Price Index will take place the week of February 24, 2020 for December 2019 data.

Sources:

• DataTree by First American
• Freddie Mac
• Census Bureau

Methodology

The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.

Disclaimer

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 $5.7 billion in 2018, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2019, First American was named to the Fortune 100 Best Companies to Work For^® list for the fourth consecutive year. More information about the company can be found at www.firstam.com.

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