Affordability Falls Year Over Year for First Time in Over Two Years, According to First American Real House Price Index

—House-buying power is likely to remain robust in the months to come, but affordability trends will likely hinge on changes in nominal house price appreciation, 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 March 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: Nominal House Price Appreciation Wipes Out Affordability Gains from Rising House-Buying Power

“Housing affordability on a year-over-year basis declined in March for the first time since January 2019, ending a more than two-year streak of rising affordability,” said Mark Fleming, chief economist at First American. “The long run of increasing affordability snapped, even as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of greater affordability relative to one year ago.

“Lower mortgage rates and higher household income compared with one year ago propelled an 11 percent increase in house-buying power. However, surging house-buying power drives demand, and rising demand in a supply constrained market accelerates nominal house price appreciation,” said Fleming. “In March, the final component of the RHPI, nominal house prices, appreciated at its fastest annual pace since 2005, 14.8 percent, wiping out any affordability boost from rising house-buying power. Yet, real estate is local and since house-buying power and nominal house price gains vary by city, local affordability trends may differ greatly city by city as well.”

Affordability Declined in 45 of 50 Major Markets

“The drop in affordability was broadly felt as affordability declined year over year in 45 of the 50 markets we track,” said Fleming. “The five markets with the greatest year-over-year decline in affordability were:

1. Kansas City, Mo.
2. Phoenix
3. Tampa, Fla.
4. Seattle
5. Austin, Texas

“Falling mortgage rates boost affordability equally in each market as mortgage rates are generally the same across the country. However, household income growth and nominal house prices vary by market, so the affordability dynamic varies as well,” said Fleming. “Faster nominal house price appreciation can erode, or even eliminate, any benefit in affordability from lower mortgage rates, especially if household income declines at the same time.

“In March, Kansas City had the greatest year-over-year decrease in affordability, mostly due to the 4.3 percent annual decline in household income and a 16.5 percent increase in nominal house prices compared with a year ago. Phoenix and Tampa both had even faster nominal house price appreciation than Kansas City, but household incomes held steady in both markets, so the relative affordability loss was less than in Kansas City,” said Fleming. “Seattle and Austin faced both faster nominal house price growth and lower household income, fueling declines in affordability in both cities. In all of these markets, the takeaway is that nominal house price appreciation accelerated to a level that eliminated any affordability gains from strong house-buying power.”

What is the Outlook for Affordability?

“If house prices continue to escalate near their current pace, some prospective home buyers that are on the margin will pull back, prompting fewer or less intense bidding wars and causing house price appreciation to moderate, which may help affordability. As more and more people are vaccinated and the economic recovery continues, demand for labor is likely increase, and that can put upward pressure on wages as employers compete to attract employees,” said Fleming. “At the same time, mortgage rates edged down slightly in April and even dipped below 3 percent in May. House-buying power is likely to remain robust in the months to come, but affordability trends will likely hinge on changes in nominal house price appreciation.”

March 2021 Real House Price Index Highlights

• Real house prices increased 4.2 percent between February 2021 and March 2021.
• Real house prices increased 3.5 percent between March 2020 and March 2021.
• Consumer house-buying power, how much one can buy based on changes in income and interest rates, declined 2.5 percent between February 2021 and March 2021, and increased 10.9 percent year over year.
• Median household income has increased 5.9 percent since March 2020 and 77.8 percent since January 2000.
• Real house prices are 21.6 percent less expensive than in January 2000.
• While unadjusted house prices are now 25.3 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 44.9 percent below their 2006 housing boom peak.

March 2021 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: Arizona (+13.9 percent), Vermont (+12.7 percent), Wyoming (+12.6 percent), Washington (+10.9 percent), and Mississippi (+9.8 percent).
• The only two states with a year-over-year decrease in the RHPI are: New York (-0.2 percent) and Illinois (-0.04 percent).

March 2021 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: Kansas City, Mo. (+16.2 percent), Phoenix (+16.0 percent), Tampa, Fla. (+12.4 percent), Seattle (+12.2 percent), and Austin, Texas (+12.1 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 Francisco (-5.3 percent), San Jose, Calif. (-2.2 percent), Miami (-0.7 percent), Riverside, Calif (-0.6 percent), and Boston (-0.6 percent).

Next Release

The next release of the First American Real House Price Index will take place the week of June 28, 2021 for April 2021 data.

Sources

• First American Data & Analytics
• 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. © 2021 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; banking, trust and wealth management services; and other related products and services. With total revenue of $7.1 billion in 2020, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2021, First American was named to the Fortune 100 Best Companies to Work For^® list for the sixth consecutive year. More information about the company can be found at www.firstam.com.

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