First American Financial Corp. has released the July 2023 First American Real House Price Index (RHPI), a measure of both house-buying power and housing affordability. The RHPI reveals real house prices increased 2% between June 2023 and July 2023. However, between July 2022 and July 2023, real house prices increased 16.9%, “bringing housing affordability to the lowest point in over three decades,” says Mark Fleming, chief economist at First American.
“Two factors drove the sharp annual decline in affordability – a 4% annual increase in nominal house prices and a 1.4 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago,” adds Fleming.
The economist notes that a solution to combat the loss of affordability caused by higher mortgage rates is an equivalent, if not greater, increase in household income: “Even though household income increased 3.7% since July 2022 and boosted consumer housebuying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices.”
Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 1% between June 2023 and July 2023, and decreased 11% percent year over year.
“The median sale price of an existing home in July, according to data from First American Data & Analytics, was approximately $345,000, while the median house-buying power was nearly $337,000. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home,” says Fleming. “While the national housing market is overvalued by this measure, applying the same analysis at the market level confirms how different housing market dynamics can be from one market to the next.”
Of the top 50 markets the RHPI tracked, 24 were overvalued in July 2023, an indicator that median existing-home sale price exceeded house-buying power. “This is significantly higher than in July 2022, when just 15 markets were considered overvalued,” says Fleming. “The most overvalued market in July was San Jose, Calif., where the median sale price of a home was nearly $1,440,000, approximately double the level of consumer house-buying power of $700,000.
The RHPI showed that San Francisco and Los Angeles were also somewhat overvalued. Despite home prices there consistently declining from last year’s peak, they have since re-accelerated. Overvalued or not, the housing supply shortage is preventing prices from adjusting downward to reflect current affordability levels shows the study.
“The good news is that most of the markets we track remain undervalued by this measure, and some markets remain significantly undervalued,” says Fleming. “For example, Detroit, Philadelphia and Cleveland are undervalued by an average of $126,000.”
The direction the volatile housing market will take in the near future seems to be anyone’s guess. “Housing overvaluation is a function of three factors: nominal house prices, household income and mortgage rates.” says Fleming. “The outlook for affordability will depend on the tug-of-war between these factors. Lower nominal house prices, lower mortgage rates, higher incomes, or some combination of the three are the only ways to bring more affordability to the housing market.”
July 2023 RHPI Highlights
Real house prices are 43.9% more expensive than in January 2000.
Unadjusted house prices are now 53.7% above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 0.7% above their 2006 housing boom peak.
The five states with the greatest year-over-year increase in the RHPI are Maine (+27.8%), Connecticut (+27%), Indiana (+25.3%), Alaska (+24.6%), and Virginia (+23.9%).
There were no states with a year-over-year decrease in the RHPI.
Among the Core Based Statistical Areas (CBSAs) tracked, the five markets with the greatest year-over-year increase in the RHPI are Indianapolis (+25.2%), Chicago (+25.2%), San Diego (+25.2%), Buffalo, N.Y. (+24.6%), and Miami (+24.5%).
Among the Core Based Statistical Areas (CBSAs), there were no markets with a year-over-year decrease in the RHPI.
