First American Financial Corporation's (NYSE: FAF) May 2019 First American Real House Price Index (RHPI)., out Monday, reports that real house prices, that is, adjusted for the impact of income and interest rate changes on consumer house-buying power over time, declined.

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Among its findings:

  • Real house prices decreased 0.7% between April 2019 and May 2019.
  • Real house prices declined 3.7% between May 2018 and May 2019.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 1.3% between April 2019 and May 2019, and increased 9.3% year over year.
  • Average household income has increased 2.8% since May 2018 and 56.4% since January 2000.
  • Real house prices are 17.0% less expensive than in January 2000.
  • While unadjusted house prices are now 3.2% above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 41.1% below their 2006 housing boom peak.

“Later this week, the Federal Open Market Committee (FOMC) will convene and likely announce a rate cut, according to experts. The first Fed rate cut since December 2008 will trigger industry and media speculation about mortgage rates declining further,” said Mark Fleming, chief economist at First American. “While changes to the federal funds rate don't directly influence mortgage rates, a rate cut will indicate concern about possible economic weakness and that may increase demand for long-term Treasury bonds, which mortgage rates follow closely."

“The consensus among economists is that the 30-year, fixed-rate mortgage will decline from its first quarter 2019 rate of 4.4% to an average of 3.9% in 2019,” said Fleming. “Additionally, the expectation of lower rates comes during the longest economic boom in history and a continued healthy labor market, prompting the question: what do low mortgage rates and a still booming economy mean for housing?”

“Fannie Mae forecasts that the 30-year, fixed-rate mortgage will fall from its July 2019 rate of 3.8% to 3.7% for the remainder of the year, boosting affordability for home buyers,” said Fleming. “The First American Real House Price Index (RHPI) adjusts home prices based on changes to consumer house-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage. 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 declines from its current July 2019 level of 3.8% to the expected level of 3.7% in the third quarter of 2019, assuming a 5% down payment, and the July 2019 average household income of $65,800, house-buying power increases a modest 0.1%, from $410,000 to $414,000,” said Fleming. “In this hypothetical 3.7% mortgage rate environment, consumer-house buying power would be 13.3% higher than it was in July 2018, when the 30-year, fixed mortgage rate was 4.5%. In fact, it would be the highest house-buying power in the history of the series, which dates to the year 2000. “It’s no secret that declining mortgage rates increase affordability. However, mortgage rates have been below 3.7% before. Indeed, in 2012, the 30-year, fixed-rate mortgage hit a low of 3.3%,” said Fleming.

“Yet, house-buying power was lower than it is today. The reason? The other half of the house-buying power equation: income. “Our estimate of average household income, based on Census and Bureau of Labor Statistics data, is at the highest level since 2000. Average nominal household incomes are nearly 57% higher today than in January 2000,” said Fleming. “Record income levels combined with mortgage rates near historic lows mean consumer house-buying power is more than 150% greater today than it was in January 2000. While rates are expected to remain low, the fate of the labor market will determine the direction of the other half of the house-buying power equation and, ultimately, affordability.”

Other findings: