The September 2021 First American Real House Price Index (RHPI) shows that real house prices increased 1.7% between August 2021 and September 2021 and 17.5% between September 2020 and September 2021, while consumer house-buying power – how much one can buy based on changes in income and interest rates – decreased 0.2% between August 2021 and September 2021 and increased 2.9% year over year.
“According to the RHPI, which measures housing affordability in the context of changes in consumer house-buying power, affordability in September declined to its lowest level since 2008,” says Mark Fleming, chief economist at First American. “Two of the three components of consumer house-buying power swung toward declining affordability.
“Record nominal house price growth and rising mortgage rates outpaced the growth in household income,” he adds. “The 30-year, fixed mortgage rate and the unadjusted house price index increased by 0.01 percentage points and 20.9 percent, respectively on a year-over-year basis. Even though household income increased 3.0 percent since September 2020 and boosted consumer house-buying power, the RHPI increased 17.5 percent compared with last September, the highest yearly growth rate since 2014.”
Median household income has increased 3% since September 2020 and 66.2% since January 2000. Real house prices are 9.4% less expensive than in January 2000. While unadjusted house prices are now 38.4% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 36.4% below their 2006 housing boom peak.
“Annual nominal house price growth in September remained near record levels and affordability declined, but the housing market is not overvalued. Historically low mortgage rates and rising incomes have allowed home buyers to borrow more, giving them the ability to bid up house prices. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home,” explains Fleming. “In September, house-buying power was more than $170,000 above the median sale price nationally, indicating that the housing market may even be undervalued. Of course, real estate is local, but even at the market level, consumer house-buying power exceeds the median home price in most markets.
“In the chart, home buyers in markets below the line have house-buying power that is greater than the median house price in their market – meaning houses are relatively more affordable in these markets and undervalued relative to house-buying power,” says Fleming. “Home buyers in markets above the line have house-buying power that is less than the median house price in their market – indicating houses in these markets are relatively less affordable and overvalued relative to house-buying power.
The five states with the greatest year-over-year increase in the RHPI are Arizona (+28.9%), South Carolina (+22%), Florida (+21.5%), Nevada (+21.2%), and Georgia (+20.4 percent%). There were no states with a year-over-year decrease in the RHPI.
“Only four of the 50 markets we track had a median sale price that exceeded house-buying power in September, and they’re all coastal cities in California. Yet, housing markets generally considered expensive, like Seattle, Washington, D.C., and Boston, are more affordable than many believe,” states Fleming. “The reason many other expensive markets are more affordable is due to high household incomes – the more you earn, the more you pay. High household incomes in combination with historically low mortgage rates fuels strong house-buying power, which in many markets remains above the median sale price of a home.”
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: Phoenix (+30.1%), Charlotte, N.C. (+27.4%), Jacksonville, Fla. (+26.2%), Tampa, Fla. (+25.5%), and Memphis, Tenn. (+22.4%). There were no markets with a year-over-year decrease in the RHPI.
“The First American Data & Analytics preliminary nominal house price index indicates slowing annual house price growth in October, as declining affordability causes some potential buyers to pull back from the market and sellers to adjust their price expectations,” mentions Fleming. “Yet, as the housing market heads into the end of the year, the ongoing supply and demand imbalance will continue to put upward pressure on house price growth. It may be hard to believe but, once adjusted for consumer house-buying power, housing is undervalued in most markets and the gap between house-buying power and median sale prices indicates there remains room for continued house price growth.”
