First American Financial Corp. has released the December 2021 First American Real House Price Index (RHPI), showing that prices increased 1.9% between November 2021 and December 2021, and increased 21.7% between December 2020 and December 2021.
Real house prices are 4.8% less expensive than in January 2000.
“In December 2021, the RHPI increased 21.7 percent compared with December 2020, the highest annual growth rate since 2014,” says Mark Fleming, chief economist at First American. “The record increase was driven by rising mortgage rates and rapid nominal house price appreciation, which make up two of the three drivers of the RHPI. The 30-year, fixed-rate mortgage and the unadjusted house price index increased by 0.4 percentage points and 21.4 percent respectively.”
The RHPI 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 over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.
“Even though household income increased 5 percent since December 2020 and boosted consumer house-buying power, it was not enough to offset the impact of higher mortgage rates and rising nominal prices on affordability,” adds Fleming. “In the near term, affordability is likely to wane further, as mortgage rates are expected to continue to rise, and the pace of house price appreciation exceeds gains in household income. How buyers and sellers react to higher rates may help the housing market regain some balance.
“When mortgage rates fall, a potential home buyer can buy the same amount of home for a lower monthly payment or buy more home for the same monthly payment. The 40-year tailwind of declining mortgage rates has allowed homeowners to buy a home at one mortgage rate and then later sell and move into a more expensive home when rates are lower,” continues Fleming. “This long-run decline in mortgage rates has encouraged existing homeowners to move out and move up.”
Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.04% between November 2021 and December 2021, and decreased 0.2% year over year.
Median household income has increased 5.2% since December 2020 and 69.3% since January 2000.
“Faster house price appreciation, modestly rising mortgage rates and record low levels of homes for sale have been the economic dynamics dominating the housing market during the second half 2021. While existing homeowners have historically high levels of equity and may feel wealthier because of it, many have also secured historically low fixed-rate mortgages,” says Fleming. “There is a financial ‘lock-in’ effect that increases as mortgage rates rise and as the size of a mortgage increases. Rising mortgage rates increase the monthly cost of borrowing the same amount that a homeowner owes on their existing mortgage. The higher the prevailing market mortgage rate is relative to the homeowner’s existing mortgage rate, the stronger the lock-in effect. Why move out and move down?”
While unadjusted house prices are now 44.5% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 33.2% below their 2006 housing boom peak.
“Additionally, the record low level of houses for sale makes it difficult to find a better, more attractive house to buy, so sellers – who are also prospective buyers – don’t sell for fear of not finding something to buy,” said Fleming. “The good news is that builders have been breaking ground on more new homes, which may alleviate some of the supply crunch and encourage existing buyers to move.”
“Nonetheless, buying a home is often prompted by lifestyle decisions more so than financial considerations,” mentions Fleming. “Despite the financial lock-in, homeowners will still make the decision to move based on lifestyle changes, such as needing more space to accommodate a growing family or relocating for a new job or other reason.”
The five states with the greatest year-over-year increase in the RHPI are Arizona (+34.3%), Florida (+32%), South Carolina (+29.4%), Connecticut (+28.6%) and Georgia (+28.4%). There were no states with a year-over-year decrease in the RHPI.
“Homeowners may feel rate-locked into their homes, but first-time home buyers have no such financial lock. Yet, first-time home buyers must also contend with the record low supply of homes in a declining affordability environment. But what goes up, must eventually moderate,” says Fleming. “Rising rates may be a housing market headwind in 2022, but as some buyers pull back from the market due to affordability and supply constraints and as new construction adds more supply, house prices will moderate, resulting in a more balanced housing market.”
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, Ariz. (+36.3%); Charlotte, N.C. (+36%); Tampa, Fla. (+32.9%); Raleigh, N.C. (+31.5%); and Atlanta, Ga. (+31.5%). Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.
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