House Prices Are Rising Fast, but Many Housing Markets Remain Undervalued, 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 December 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: House-Buying Power Up 21 Percent Year Over Year
“Punxsutawney Phil may have signaled six more weeks of winter, but in housing, it looks like spring (home buying) has already arrived. Typically, the housing market winds down a bit in the winter, but America’s housing market is booming, even in the colder months. The First American Data & Analytics nominal house price index indicates unadjusted home prices nationwide increased by 12.4 percent in December compared with one year ago and are nearly 21 percent above the housing boom peak in 2006,” said Mark Fleming, chief economist at First American. “While nominal prices have risen, house-buying power has grown even faster, increasing 21 percent year over year due to historically low rates and still rising incomes for those employed. Even though purchasing power is outpacing price appreciation, the rapid rise in house prices does prompt fears of a repeat of the 2008 crisis, even among some in the housing industry. But last time was different.
“The housing market today is not the same as the housing market during the bubble years. Most importantly, today’s housing market is not overvalued. Considering only the nominal level of house prices is not sufficient to determine whether the market is overvalued or not. Lower mortgage interest rates and rising incomes correspond with higher house prices as home buyers can afford to borrow and buy more,” said Fleming. “If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded house-buying power in 2006 nationally, but today house-buying power is nearly twice as high as the median sale price nationally. Of course, real estate is local and not all markets are created equal.”