Record Equity Levels Unlikely to Spur Many Homeowners to Sell, 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 February 2021 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: Affordability Declines 1.6 percent Month Over Month
“The three components of the RHPI are household income, mortgage rates and a nominal house price index. The RHPI adjusts nominal house prices according to changes in income and interest rates, which together make up consumer house-buying power. When incomes rise, house-buying power rises as well,” said Mark Fleming, chief economist at First American. “However, when mortgage rates rise, house-buying power declines. Similarly, house-buying power declines when unadjusted nominal house prices rise.
“In February 2020, nominal house prices soared and mortgage rates increased, offsetting any affordability benefit from an increase in income levels. As a result, the RHPI increased 1.6 percent over January, meaning affordability declined,” said Fleming. “Yet, compared with one year ago, affordability improved 1.3 percent, according to the RHPI. Nationally, affordability is likely to wane further in March due to the modest rise in mortgage rates and faster house price appreciation outpacing gains in household income.”
The Housing Wealth Effect: Fact or Fiction?
“The rapid pace of annual nominal house price appreciation, just over 14 percent in February, begs the question: isn’t rapid house price growth good news for existing homeowners looking to move? According to a behavioral economic theory dubbed ‘the wealth effect,’ homeowners are more likely to move if they feel ‘wealthier’ because the value of their home rises,” said Fleming. Yet, that homeowner would be entering the housing market at a time when all the other homes in the area have likely appreciated by the same amount. While the homeowner’s equity gains boost wealth, the equity gains allow the homeowner to keep pace with the housing market, rather than outpace it. So, if feeling wealthier doesn’t actually help buy more home, what can incentivize a homeowner to sell? Falling mortgage rates.