Real house prices are still on the upswing even though sales have cooled, accordint to First American Financial Corporation’s (NYSE: FAF) First American Real House Price Index (RHPI) released Monday.
According to the Index:
- Real house prices remained flat between June 2018 and July 2018.
- Real house prices increased 12.2% year over year.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.9% between June 2018 and July 2018, and declined 3.7% year over year.
- Average household income has increased 2.9% since July 2017 and 53% since January 2000.
- Real house prices are 37.9% below their housing boom peak in July 2006 and 12.0% below the level of prices in January 2000.
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.
“The Federal Open Market Committee (FOMC) meeting is just around the corner and a rate hike is almost certain, according to experts, which will trigger conversations about rising mortgage rates across the housing industry. While changes to the federal funds rate won’t necessarily spur further increases in mortgage rates, mortgage rates are expected to rise nonetheless,” said Mark Fleming, chief economist at First American.
“Consensus among economists is that the 30-year, fixed mortgage rate will increase from its current rate of 4.53 to an average of 5% in 2019,” said Fleming. “Last week, we analyzed what a rate of 5.0% could mean for existing-home sales. The result? Home sales will continue to grow despite rising rates, due to the strength of economy. But, what will 5% mortgage rates mean for affordability?
“The First American Real House Price Index (RHPI) measures consumer house-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage,” said Fleming. “Shifts in income and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases.
“If the mortgage rate increased from its current level of 4.5% to the expected level of 5 percent, assuming a 5% down payment, and the July 2018 average household income of $64,000, we find that house-buying power falls a modest 5.5%, from $366,000 to $346,000,” said Fleming. “In this hypothetical 5% mortgage rate environment, consumer-house buying power would be 11% lower than it was in July 2017, when the 30-year, fixed mortgage rate was 3.97%.”
