First American Financial Corp.’s March 2022 First American Real House Price Index (RHPI) shows that real house prices increased 6.7% between February 2022 and March 2022. Real house prices increased 32.5% between March 2021 and March 2022. Real house prices are 12% more expensive than in January 2000.
“In March 2022, the Real House Price Index increased 32.5 percent year over year, which is the fastest growth in the more than 30-year history of the series,” says Mark Fleming, chief economist at First American. “This rapid annual decline in affordability was driven by two factors: a 21.6 percent annual increase in nominal house prices and over a full percentage point increase in the 30-year, fixed mortgage rate compared with one year ago. Even though household income increased 4.9 percent since March 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices.”
Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 4.6% between February 2022 and March 2022, and decreased 8.3% year over year.
“Reduced affordability prompts some buyers to pull back from the market and sellers to adjust their price expectations. The housing market is slowing down by design as the Federal Reserve tightens monetary policy in order to tame inflation,” continues Fleming. “Early data signals the housing market is normalizing – our preliminary nominal house price index for the months of April and May indicates annual house price growth is decelerating. Historical data provides helpful perspective on how house prices react to rising mortgage rates.”
Median household income has increased 4.9% since March 2021 and 70.8% since January 2000.
While unadjusted house prices are now 50.8% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 21.1% below their 2006 housing boom peak.
“Rising mortgage rates and declining affordability have been two of the defining trends of the 2022 housing market. However, mortgage rates and their effect on home prices may not be as straightforward as many think. The graph shows unadjusted house prices in nine rising mortgage rate eras over the past 28 years,” adds Fleming. “More often than not, house price appreciation has been resistant to rising mortgage rates. One exception is the 1994 rising-rate era, when house prices declined slightly and briefly. Another exception is the 2005-2006 period, otherwise known as the U.S. housing bubble, when house prices peaked in early 2006 and started to decline through 2006 and 2007. The rising rate periods during the housing bust of 2008 and 2009 is another key exception.
The five states with the greatest year-over-year increase in the RHPI are Florida (+46.7%), South Carolina (+46.1%), Georgia (+40.5%), Arizona (+39.7%) and Idaho (+37.7%). There were no states with a year-over-year decrease in the RHPI.
“In the longest rising mortgage rate era, 1998-2000, nominal house prices remained elevated as the economy continued to recover from the previous recession. This period was defined by tight labor markets, low inflation, and a higher minimum wage – all contributing to a healthy housing market,” mentions Fleming. “In just over a year and a half, house prices increased nearly 14 percent during this era. In the most recent rising mortgage rate era from 2017 through 2018, nominal house prices increased approximately 7 percent over a 15-week period.”
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 Charlotte, N.C. (+46.6%); Raleigh, N.C. (+43.5%); Tampa, Fla. (+43.3%), Phoenix, Ariz. (+42.0%); and Jacksonville, Fla. (+41.2%). There were no markets with a year-over-year decrease in the RHPI.
“House prices don’t fall just because mortgage rates rise. Rising mortgage rates do influence house prices, but broader economic conditions are often more influential. The Federal Reserve is purposely trying to slow the housing market in order to tame inflation, and early indications, based on our preliminary house price index, signal a normalizing housing market,” concludes Fleming. “History has shown that rising mortgage rates may take the steam out of rising house prices, but they don’t necessarily trigger a decline. In today’s housing market, demand for homes continues to outpace supply, which is keeping the pressure on house prices, so don’t expect house prices to decline.”