House Prices Over 40 Percent More Affordable Than Housing Boom Peak, 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 June 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 for Fourth Consecutive Month

“The Real House Price Index (RHPI) measures affordability in the context of changes in consumer house-buying power, incorporating fluctuations in household income, mortgage rates and nominal house prices. In June, housing affordability declined on a year-over-year basis for the fourth month in a row, following two years of increasing affordability,” said Mark Fleming, chief economist at First American. “The decline in June occurred even as two of the three key drivers of the RHPI, household income and mortgage rates, swung in favor of greater affordability relative to one year ago.

“House-buying power, how much one can buy based on changes in income and interest rates, increased by 6.8 percent in June compared with a year ago, propelled by lower mortgage rates and higher household income,” said Fleming. “The affordability gain from increased house-buying power, however, was offset by the third component of the RHPI, nominal house price appreciation, which reached a record 19 percent compared with a year ago, eclipsing the record for price appreciation of 17.5 percent set in 2005. Indeed, nominal house prices in June were 32 percent higher than at the housing boom peak for prices in 2006, but that’s not the whole story.”

Real House Prices are 42 Percent Below Housing Boom Peak

“Nominal house prices are well above the housing boom peak, but real, house-buying power-adjusted house prices remain 42 percent below the 2006 housing boom peak. House-buying power has benefited from a long-run decline in mortgage rates and the slow, but steady growth of household income. Since the housing boom peak in unadjusted prices in 2006, the average 30-year, fixed mortgage rate has fallen by approximately 3.3 percentage points, from 6.32 percent to 2.98 percent. Over the same period, nominal household income has increased 55 percent,” said Fleming. “The dramatically lower mortgage rates and higher income levels mean home buyers in June had 129 percent more house-buying power than in 2006. House-buying power matters because people buy homes based on how much it costs each month to make a mortgage payment, not the price of the home.”