First American Financial Corporation (NYSE: FAF), a provider of title insurance, settlement services and risk solutions for real estate transactions, on Monday released data that indicates that, in real terms, home prices actually declined in August.

U.S. home sellers received more than asking price on 24.1 percent of 2017 sales, netting an additional $7,000 on average.
Courtesy Adobe Stock

This is according to the August 2019 First American Real House Price Index (RHPI), which 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.

August 2019 Real House Price Index

  • Real house prices decreased 1.3% between July 2019 and August 2019.
  • Real house prices declined 5.9% between August 2018 and August 2019.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 2.5% between July 2019 and August 2019, and increased 14.8% year over year.
  • Median household income has increased 2.6% since August 2018 and 57.6% since January 2000.
  • Real house prices are 18.6% less expensive than in January 2000.
  • While unadjusted house prices are now 8.3% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 42.0% below their 2006 housing boom peak.

“Understanding the dynamics that influence consumer house-buying power, how much home one can buy based on changes in income and interest rates, provides a helpful perspective on the housing market. When incomes rise, consumer house-buying power increases. When mortgage rates or nominal house prices rise, consumer house-buying power declines,” said Mark Fleming, chief economist. “Our Real House Price Index (RHPI) uses consumer house-buying power to adjust nominal house prices, offering insight into affordability.

“For example, according to our RHPI, real house prices decreased nearly 6% year over year in August, marking a significant gain in affordability. Since August 2018, mortgage rates decreased 0.93-percentage points and household income grew by 2.6% – both improving house-buying power and affordability,” said Fleming. “However, rising nominal house prices reduce affordability, and nominal house price appreciation grew by 8.0% compared with one year ago. Ultimately, this continual “tug-of-war” between house-buying power and nominal house prices determines the fate of real house prices.”

Housing Affordability in 2019 Transformed by Dynamic Duo – Mortgage Rates and Income Growth

“In 2019, falling mortgage rates helped create a housing market that behaved very different than the housing market in the second half of 2018. Mortgage rates began their descent in December 2018 and have continued to fall through August, significantly influencing affordability,” said Fleming. “According to our RHPI, the 0.85 percentage point drop in mortgage rates from January 2019 through August 2019 increased affordability by 9.7%. That translates to a $40,200 improvement in house-buying power in just eight months.

“As rates have fallen in 2019, the economy has continued to perform well also, resulting in a tight labor market and wage growth. Wage growth pushes household incomes upward, which were 1.5% higher in August compared with January,” said Fleming. “The growth in household income increased consumer house-buying power by 1.5%, pushing house-buying power up an additional $5,600.

“During this same time, nominal house prices increased by 5.7%, reducing affordability. In January 2019, a family with the median household income in the U.S. could afford to buy a $373,900 house. By August, that home had appreciated to $395,000, an increase of $21,100. But, house-buying power increased by $45,800 over the same eight-month time period,” said Fleming. “The improvement in house-buying power was more than double the $21,100 increase in house prices. This year, through August, home buyers’ purchasing power has far outpaced the appreciation of the homes they are buying, so home buyers were in a better position in August, despite the increase in nominal house prices. "

The Future of Affordability
“In 2019, the dynamic duo of lower mortgage rates and rising incomes overcame the negative impact of rising house price appreciation on affordability. Indeed, affordability reached its highest point since January 2018,” said Fleming. “Focusing on nominal house price changes alone as an indication of changing affordability, or even the relationship between nominal house price growth and income growth, overlooks what matters more to potential buyers – surging house-buying power driven by the dynamic duo of mortgage rates and income growth. And, we all know from experience, you buy what you can afford to pay per month.”

August Real House Price State Highlights

  • There are no states with a year-over-year increase in the RHPI.

August 2019 Real House Price Local Market Highlights

  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, there are no markets with a year-over-year increase in the RHPI.