Consumer House-Buying Power May Reach Record in 2019, According to First American Real House Price Index
July 29 2019 - 7:00AM
Business Wire
—If the 30-year, fixed-rate mortgage
declines just a fraction more, consumer house-buying power would
reach its highest level in almost 20 years, says Chief Economist
Mark Fleming—
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 May
2019 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.
May 2019 Real House Price Index
- Real house prices decreased 0.7 percent between April 2019 and
May 2019.
- Real house prices declined 3.7 percent 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 percent between
April 2019 and May 2019, and increased 9.3 percent year over
year.
- Average household income has increased 2.8 percent since May
2018 and 56.4 percent since January 2000.
- Real house prices are 17.0 percent less expensive than in
January 2000.
- While unadjusted house prices are now 3.2 percent above the
housing boom peak in 2006, real, house-buying power-adjusted house
prices remain 41.1 percent below their 2006 housing boom peak.
Chief Economist Analysis: Mortgage Rates Below Four Percent
Likely in 2019
“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
percent to an average of 3.9 percent 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?”
Mortgage Rates and Income Growth Boosting Consumer
House-Buying Power
“Fannie Mae forecasts that the 30-year, fixed-rate mortgage will
fall from its July 2019 rate of 3.8 percent to 3.7 percent 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 percent to the expected level of 3.7 percent in the third
quarter of 2019, assuming a 5 percent down payment, and the July
2019 average household income of $65,800, house-buying power
increases a modest 0.1 percent, from $410,000 to $414,000,” said
Fleming. “In this hypothetical 3.7 percent mortgage rate
environment, consumer-house buying power would be 13.3 percent
higher than it was in July 2018, when the 30-year, fixed mortgage
rate was 4.5 percent. 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 percent
before. Indeed, in 2012, the 30-year, fixed-rate mortgage hit a low
of 3.3 percent,” 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 percent
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 percent 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.”
May Real House Price State Highlights
- The four states with the greatest
year-over-year increase in the RHPI
are: Wisconsin (+1.5 percent), Maryland (+0.2 percent), New
Hampshire (+0.2 percent), and Rhode Island (+0.1 percent).
- The five states with the greatest
year-over-year decrease in the RHPI
are: North Dakota (-8.5 percent), Wyoming (-8.0 percent),
California (-7.1 percent), Arkansas (-5.8 percent), and New Mexico
(-5.7 percent).
May 2019 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First
American, the five markets with the greatest year-over-year increase in the RHPI are: Providence, R.I. (+2.2
percent), Milwaukee (+1.1 percent), Columbus, Ohio (+0.7 percent),
Detroit (+0.7 percent), and Las Vegas (+0.1 percent).
- Among the Core Based Statistical Areas (CBSAs) tracked by First
American, the five markets with the greatest year-over-year decrease in the RHPI are: San Jose, Calif. (-13.9
percent), Seattle (-9.4 percent), San Francisco (-7.8 percent),
Portland, Ore. (-7.7 percent), and Riverside, Calif. (-7.0
percent).
Next Release
The next release of the First American Real House Price Index
will take place the week of August 26, 2019 for June 2019 data.
Sources:
- DataTree by First American
- Freddie Mac
- Census Bureau
Methodology
The methodology statement for the First American Real House
Price Index is available at
http://www.firstam.com/economics/real-house-price-index.
Disclaimer
Opinions, estimates, forecasts and other views contained in this
page are those of First American’s Chief Economist, do not
necessarily represent the views of First American or its
management, should not be construed as indicating First American’s
business prospects or expected results, and are subject to change
without notice. Although the First American Economics team attempts
to provide reliable, useful information, it does not guarantee that
the information is accurate, current or suitable for any particular
purpose. © 2019 by First American. Information from this page may
be used with proper attribution.
About First American
First American Financial Corporation (NYSE: FAF) is a
leading provider of title insurance, settlement services and risk
solutions for real estate transactions that traces its heritage
back to 1889. First American also provides title plant management
services; title and other real property records and images;
valuation products and services; home warranty products; property
and casualty insurance; banking, trust and wealth management
services; and other related products and services. With total
revenue of $5.7 billion in 2018, the company offers its products
and services directly and through its agents throughout the United
States and abroad. In 2019, First American was named to the Fortune
100 Best Companies to Work For® list for the fourth consecutive
year. More information about the company can be found at
www.firstam.com.
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Media Contact: Marcus Ginnaty Corporate Communications
First American Financial Corporation (714) 250-3298
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American Financial Corporation (714) 250-5214
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