Property Prices Have Climbed 27%, But Homes Are Still Affordable Relative To 2006 Peak

According to First American’s senior economist, Mark Fleming, the First American Real House Price Index (RHPI) of January 2022 climbed by approximately 27%, the quickest rate of gain since 2004.

Comparing to the same period last year, nominal property prices rose by 21.7% and the 30-year fixed rate mortgage increased by 0.7 points. Since the beginning of last year, household income has climbed by 5%, but this has not been enough to overcome the negative effects of high mortgage rates and nominal pricing.

The RHPI tracks price fluctuations in single-family homes across the United States over time, adjusting for the influence of interest rate and income changes on customer home buying capability at the state, metropolitan and national area levels. Since it measures home-buying power, the RHPI can be used as an indicator of house price.

Fleming stated that affordability will be more difficult as rising mortgage rates and increasing house prices exceed family income increases. However, it is important to consider affordability within context.

The natural properties buying power-adjusted prices of homes in the United States is still 29% lower than their April 2006 high. Despite the fact that consumer home-buying power has fallen since April 2006, it remains at record levels and almost twice what it was in April 2006. This is due to increased family incomes and lower mortgage rates. The average mortgage interest rate is about three percentage points lower and family incomes are around 48% higher than they were in April 2006. In reality, national real property values are similar to 2000.

The RHPI tracks 50 markets that have seen their housing prices rise in nominal terms. The reality is that nominal property prices are not indicative of affordability. Fleming reports that while nominal property prices are on the rise, house-buying prospects have increased. This is due to a long-term decline in mortgage interest rate and slow but steady growth in family income.

The long-term drop of lending rates in all markets will increase affordability because loan rates remain essentially the same across the country. Similar to the above, affordability varies geographically because of differences in nominal property prices and family income.

Fleming stated that homes in 50 markets are 34% cheaper than their highs, according to the RHPI adjusted price for property. The current supply-demand imbalance in the US housing market is fueling significant property price growth. However, the substantial increase in home-buying ability since 2006, fueled largely by lower interest rates, higher earnings and a massive increase of home-buying power has overcompensated. Four major cities now have homes that are more affordable than they were at the peak of RHPI.

Some cities, such as Riverside (California), Miami (50%), Chicago (52%), Baltimore (53%), Washington D.C. (53%), have seen their housing prices rise since their peak. Salt Lake City (15%) Kansas City (12%) Denver (9%) Buffalo, New York (3%) and Nashville, Tennessee (0.3%) are some of the cities where affordability has fallen the most.

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