First American Launches Inaugural Real House Price Index

U.S. home prices were flat in March compared with February but increased 2.1% compared with March 2015, according to First American Financial Corp.’s inaugural Real House Price Index.

The monthly report 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. Because the index adjusts for house-buying power, it also serves as a measure of housing affordability. Results are presented at national, state and metropolitan area levels.

“After adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom,” says Mark Fleming, chief economist at First American, in a release. “Real house prices are 39.1 percent below their housing-boom peak in July 2006 and 18 percent below the level of prices in January 2000.”

First American is forecasting that home prices will increase 5.1% on an unadjusted basis in March compared with March 2015. That would bring home prices to within 2.9% of the peak seen in 2007.

“While median household income growth since the end of the recession has barely kept pace with inflation, mortgage rates, particularly for the popular 30-year, fixed-rate mortgage, have declined significantly,” Fleming says. “At the end of the recession in 2009, the 30-year, fixed-rate mortgage was over five percent. It has subsequently declined to below four percent today. Low rates have fueled increases in consumer house-buying power, keeping real house prices low by historic standards.

“Many potential home buyers this spring may experience sticker shock when house hunting, as unadjusted prices are consistently outpacing income growth,” Fleming adds. “Yet, the real price level is much lower than even in the years before the housing boom, largely because consumer house-buying power is significantly higher today due to the current environment of historically low mortgage rates.”

States that saw the largest increases in home prices, year over year, in March included North Dakota (+16.0%), Wyoming (+14.7%), Rhode Island (+12.2%), Delaware (+6.0%) and Missouri (+5.6%).

States that saw the biggest decreases in home prices, year over year, included the District of Columbia (-5.5%), Alaska (-5.2%), Maryland (-5.0%), Pennsylvania (-4.4%) and West Virginia (-4.2%).

The report also looks at home price trends by metropolitan area, with a special focus on San Francisco and Detroit, which, according to Fleming, “experienced similar real price declines – about 60 percent over the course of three years,” and yet, “very little ‘recovery’ has occurred in real prices.”

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