—EEven if affordability constrained buyer demand causes prices to fall in some markets, potential sellers are unlikely to lose all of the equity they have acquiredsays chief economist Mark Fleming—
First American financial company (NYSE:FAF),a leading provider of title, settlement and underwriting solutions for real estate transactions and at the forefront of its industry’s digital transformation, today released the First American Real House Price Index (RHPI) for September 2022. The RHPI measures single-family home price changes across the United States, adjusted for the impact of changes in income and interest rates on consumer purchasing power over time at the national, state, and metropolitan levels.Because the RHPI is adjusted for the purchasing power of housing, it also serves as a measure of housing affordability.
Analysis by the Chief Economist: Real house prices rose 10.5 percent month over month
“In September 2022, the RHPI increased by 60.6 percent on an annual basis. This rapid annual decline in affordability was driven by two factors — a 13.5 percent annual increase in nominal home prices and a 3.2 percentage point year-over-year increase in the average 30-year fixed-rate mortgage rate. Although household income has increased 3.1 percent since September 2021 and boosted consumers’ purchasing power for homes, this was not enough to offset the loss of affordability from higher mortgage rates and rapidly rising nominal prices,” said Mark Fleming, chief economist at First American. “As affordability falls and prompts buyers to pull out of the market, nominal house price growth has slowed. Nationally, annual nominal house price growth peaked at nearly 21 percent in March, but has since slowed about 7 percentage points to 13.5 percent in September.
“But real estate is local, and there are markets where annual price growth is not only slowing, but prices are falling from recent highs,” Fleming said. “Nominal house prices in many markets are expected to fall further as the best sellers’ pandemic market turns in favor of buyers, but not everything gained in the pandemic will necessarily be lost.”
Not everything that has been won will be lost
“The pandemic housing market has been unprecedented in a number of ways. The housing market was already strong before 2020, but the pandemic redefined the role of home ownership and led to a surge in demand. As working from home became the new normal, a home was no longer just an apartment or a vehicle for wealth creation, but also an office, classroom, daycare, and even a gym. The increasing role of home ownership in American life, coupled with record-low mortgage rates and limited housing supply, propelled the housing market to multiple records during this unprecedented time — the fastest annual home price increase, the lowest days on the market on record, and a near-record annual pace of sales ,” Fleming said. “But the pandemic housing market has been the exception, not the norm. Double-digit house price growth was unsustainable over the long term. As the saying goes, what goes up must ‘eventually’ come down. Sellers may be tied to yesterday’s prices, but buyers won’t buy unless sellers adjust prices downward to reflect the reality of higher mortgage rates that limit affordability. Sellers are beginning to recognize this, and price drops are becoming more common.
“Nominal house prices declined in September from their recent highs in 15 of the top 50 markets we track. The market with the biggest decline was San Francisco, where nominal home prices peaked in March 2022 but have since declined 6.8 percent as the housing market rebalances,” Fleming said. “San Jose follows closely as nominal home prices are down 5.9 percent from a recent peak in April 2022.
“As prices in these markets retreat from the peak, a majority of the homeowners who have won during the pandemic remain. For example, home prices in both San Francisco and San Jose rose 29 percent from February 2020 to their respective peaks in 2022,” Fleming said. “The home price declines would have to be significant to eat up all the equity that many homeowners have accumulated over the last several years.”
Rebalancing is healthy
“Purchasing power for homes is down $145,500 from a year ago, primarily due to higher mortgage rates. Affordability will likely weigh on the housing market until purchasing power for houses recovers when house prices fall. Home prices have already started to adjust to the reality of higher mortgage rates in many markets, which will help bring more balance to the home market by 2023,” Fleming said. “Prospective home sellers have gained significant amounts of equity during the pandemic, so potential sellers are unlikely to lose all they have gained, even if affordability-constrained buyer demand leads to price declines in some markets.”
September 2022 Real House Price Index Highlights
- Real house prices increased by 10.5 percent between August 2022 and September 2022.
- Real house prices increased by 60.6 percent between September 2021 and September 2022.
- Consumer purchasing power for homes, which is how much one can buy based on changes in income and interest rates, fell 8.9 percent between August 2022 and September 2022 and 29.3 percent year-on-year.
- Median household income has increased by 3.1 percent since September 2021 and by 77 percent since January 2000.
- Real house prices are 38.1 percent higher than in January 2000.
- While unadjusted home prices are now 55.4 percent above the peak of the 2006 housing boom, real home purchasing power-adjusted home prices remain 2.5 percent below the peak of the 2006 housing boom.
September 2022 Real House Price Condition Highlights
- The five states with the largest year for year increase in the RHPI are: Florida (+78.3 percent), Georgia (+66.9 percent), Arkansas (+65.8 percent), South Carolina (+64.9 percent), and Alabama (+64.7 percent).
- There were no states with a year-over-year reduction in the RPI.
September 2022 Real House Price Local Market Highlights
- Among the Core Based Statistical Areas (CBSAs) tracked by First American are the five markets with the largest year for year increase in the RHPI are: Miami (+82.5 percent), Tampa, Florida (+73.4 percent), Indianapolis (+70.4 percent), Nashville, Tennessee (+69.6 percent) and Orlando, Florida (+69 .3 percent).
- There were no year-on-year comparison markets among the Core Based Statistical Areas (CBSAs) tracked by First American reduction in the RPI.
The next release of the First American Real House Price Index will be in the week of December 26, 2022 for October 2022 data.
The First American Real House Price Index methodology statement is available at http://www.firstam.com/economics/real-house-price-index.
Opinions, estimates, forecasts and other views contained on this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, and should not be construed as an indication of First American’s business prospects or anticipated results, and are subject to change without prior notice. While the First American Economics team attempts to provide reliable and useful information, it does not guarantee that the information is accurate, current, or fit for any particular purpose. © 2022 First American. Information from this site may be used with proper attribution.
First American Financial Company (NYSE:FAF) is a leading provider of title, settlement and risk solutions for real estate transactions. With a combination of financial strength and stability built over more than 130 years, innovative proprietary technologies and unmatched data assets, the company is at the forefront of the digital transformation of its industry. First American also provides data products to the title industry and other third parties; assessment products and services; undersupply of mortgages; home warranty products; banking, trust and asset management; and other related products and services. With total 2021 revenues of $9.2 billion, the company provides its products and services directly and through its agents in the United States and abroad. In 2022, First American was named one of the 100 Best Places to Work by Great Place to Work® and wealth magazine for the seventh consecutive year. More information about the company can be found at www.firstam.com.