Housing Market Can Thrive in a Rising-Rate Era, According to First American Real House Price Index

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the November 2020 First American Real House Price Index (RHPI). 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.

Chief Economist Analysis: Real House Prices Declined 6.2 Percent Year Over Year in November

“Even though nominal house prices continued to surge, affordability improved in November as two of the three key drivers of the RHPI, household income and mortgage rates, swung in favor of increased affordability,” said Mark Fleming, chief economist at First American. “Real house prices declined by 6.2 percent relative to one year ago, thanks to the benefit of increased buying power.”

“While mortgage rates fell in November, in more recent data from January 2021, mortgage rates have increased slightly due to a more positive economic outlook,” said Fleming. “The uptick in rates sparked questions about how the housing market will react as rates rise.”

Existing-Home Sales When Mortgage Rates Rise

“Historically, when mortgage rates rise, existing-home sales don’t necessarily fall. We examined how the housing market responded to six significant rising-rate eras over the last 30 years. The 2005-2006 rising-rate era preceding the 2008 housing crisis stands out because existing-home sales fell dramatically. Existing-home sales also decreased in the 1994 rising-rate era, as the Federal Reserve increased the federal funds rate to prevent strong economic growth from feeding inflation,” said Fleming. “However, in the four other rising-rate eras we examined, existing-home sales increased (1996, 1998-2000, 2013), or only declined after prolonged resistance (2017-2018). Context matters and each rising-rate era is different. The housing market response depends on the reason why rates are rising.”