Price Appreciation May Have Reached Tipping Point, According to First American Real House Price
Index
—We’re seeing the first indications that price appreciation may be slowing, but the underlying
fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline, says Chief
Economist Mark Fleming—
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 June 2018
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.
June 2018 Real House Price Index
- Real house prices increased 1.5 percent between April 2018 and May 2018.
- Real house prices increased 11.4 percent year over year.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates,
declined 1.0 percent between April 2018 and May 2018, and declined 3.6 percent year over year.
- Real house prices are 36.9 percent below their housing boom peak in July 2006 and 11.0 percent below
the level of prices in January 2000.
- Unadjusted house prices increased by 7.3 percent in May on a year-over-year basis and are 0.8 percent
above the housing boom peak in 2006.
Chief Economist Analysis: Today’s Housing Market is Different Than Previous Housing Boom
“House price appreciation remains on a tear, as unadjusted home prices nationwide increased by 7.3 percent compared with a year
ago and are now 1.3 percent above the housing boom peak in 2006, according to
DataTree by First American,” said Mark Fleming, chief economist at First American. “The U.S. economy continues to perform well,
as the current economic expansion reaches
record levels, prompting some to ponder when it will end.
“It’s no secret the housing market played a central role in the last recession, so many may expect history to repeat,” said
Fleming. “However, the housing market today is very different from the housing market during the previous housing boom.”
What’s Different Now?
“The price appreciation experienced in the housing market during the mid-2000s was characterized by a surge in demand driven by
wider access to mortgage financing. Price appreciation in today’s housing market is characterized by a shortage of supply,” said
Fleming. “The supply of homes on the market remains
extremely low, and the homes that hit the market
sell very quickly – an indication that demand is outpacing supply.
“The low inventory, combined with income and employment growth,
tighter mortgage underwriting, and strong economic fundamentals, fuels price appreciation that is very different than the price
appreciation during the housing boom that peaked in 2006,” said Fleming. “Today, house prices are rising because of a
lack of supply of homes for sale,
near record low mortgage rates and the strong underlying economic fundamentals of the second longest expansion in U.S.
history.”
Consumer House-Buying Power Stronger Today than Previous Housing Boom Years
“While unadjusted house prices are 1.3 percent above the housing market peak in 2006, consumer house-buying power has increased
by 55 percent over the same time period. House-buying power, how much one can buy based on household income and the 30-year,
fixed-rate mortgage, has benefited from a declining rate environment, and slow, but steady household income growth,” said Fleming.
“Consumers buy homes based on how much it costs each month to make a mortgage payment, not the price of the home. Lower mortgage
interest rates and growing incomes mean home buyers can afford to borrow more and buy more, which drives price appreciation.
“In fact, after considering changes to household income levels and the 30-year, fixed-rate mortgage, our
Real House Price Index (RHPI) shows that consumer house-buying power-adjusted house prices are 36.9 percent below their housing
boom peak in July 2006 and remain 11.0 percent below the level of prices in January 2000,” said Fleming.
Has House Price Appreciation Reached a Tipping Point?
“Real estate markets tend to move in cycles, but they do not always end in a housing bust. As rising prices and modestly rising
mortgage rates undermine affordability and buyers struggle to find something to buy with so little for sale, it’s natural to see
some moderation in price appreciation,” said Fleming. “In fact, we are already beginning to see cooling in some markets. According
to our RHPI, 21 markets experienced a monthly decline in their RHPI levels in June, which is the largest number of markets to see
declines since September 2017. The five cities with the greatest month-over-month decrease in their RHPI levels in June 2018 were
Pittsburgh (-2.0 percent), Raleigh, N.C. (-0.5 percent), Charlotte, N.C. (-0.5 percent), Riverside, Calif. (-0.4 percent) and
Minneapolis (-0.4 percent).
“As buyers pull back from the market and sellers adjust their price expectations, house prices will adjust, but the strong
economic conditions and the shortage of supply relative to demand continue to support the housing market,” said Fleming. “We’re
seeing the first indications that price appreciation may be slowing, but the underlying fundamental housing market conditions
support a natural moderation of house prices rather than a sharp decline.”
June 2018 Real House Price State Highlights
- The five states with the greatest year-over-year increase in the RHPI are: Nevada (+21.0 percent), Ohio (+18.5 percent), New York (+18.3 percent), Michigan
(+17.5 percent), and New Hampshire (+17.2 percent).
- No state had a year-over-year decrease in the RHPI in June.
June 2018 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: San Jose, Calif.
(+25.0 percent), Cleveland (+24.5 percent), Las Vegas (+24.5 percent), Jacksonville, Fla. (+19.0 percent), and Charlotte, N.C.
(+18.8 percent).
- No CBSA had a year-over-year decrease in the RHPI in June.
Next Release
The next release of the First American Real House Price Index will take place the week of September 24, 2018, for July 2018
data.
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. © 2018 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
$5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and
abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for
the third consecutive year. More information about the company can be found at
www.firstam.com.
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