Key Points:

• National affordability improved on an annual basis for the second consecutive month yet remains low historically.
  
  
• In deciding whether to rent or own, it’s important to remember the wealth-building power of equity accumulation.
  
  
• Even homeowners who bought at the height of the housing boom in 2006 have gained $169,000 in equity, while renters over that same time period cumulatively lost $229,000 in wealth. 

National affordability on an annual basis improved for the second consecutive month in September. Two factors drove the 9.2 percent annual increase in affordability – a 3.1 percent annual increase in nominal household income and a one percentage point decrease in the 30-year, fixed mortgage rate compared with one year ago. Nominal house price appreciation slowed nationally for the ninth consecutive month in September, but still reached another record high. Yet, the increase in nominal house prices was not enough to offset the improved affordability from lower mortgage rates and higher household income. 

Despite the recent improvement, affordability nationally as measured by the RHPI remains 36 percent below the pre-pandemic historical average. 

“When your home, in the long run, pays you, it makes more sense to buy than to rent,” 

Can Your House Pay You to Live There?

For those trying to buy a home, house price appreciation can be intimidating and makes the purchase more expensive, all else held equal. However, once the home is purchased, appreciation helps build equity in the home, and becomes a wealth-generating benefit. As potential first-time home buyers consider homeownership in today’s market, they should carefully weigh the costs, and potential future benefits, of owning a home against the cost of renting.

In our rent-versus-own analysis, the annual cost of renting is simply the amount of rent paid that year. The annual cost of owning a home includes taxes, repairs, homeowner’s insurance and the mortgage principal and interest payments. To calculate the annual cost of homeownership, our analysis assumes the potential buyer is taking out a 30-year, fixed-rate mortgage with a 5 percent down payment on a median-priced home. Finally, our annual cost-to-own analysis factors in the potential benefit of equity accumulation through house price appreciation or potential cost of lost equity from declining house prices. If the homeowner loses equity, it is added to the annual costs of owning. If a homeowner gains equity, it reduces the annual costs of owning. If the annual equity gained exceeds the other annual costs of owning, then the house “paid you” to live there.

How Much Has Your House Paid You?

The chart below compares the cumulative wealth gained from owning with the cumulative wealth lost from renting using three different intervals – peak of the housing bubble in 2006 to current, 10-year window from 2014 to current and pre-pandemic 2019 to current. In all three scenarios, it’s clear that homeowners who owned their home long enough gained more in equity than their cumulative ownership costs. In other words, their house ultimately “paid them.” Renters who continue renting incur costs that add up cumulatively over the years.

Homes Purchased at Peak of the Housing Bubble in 2006 to Current: $169,000

For example, the cumulative annual cost of a median-priced home purchased at the peak of the housing bubble in 2006 with the average mortgage rate at that time was just over $23,000 in principal, interest, taxes, and insurance for the first year. In the following years, house prices declined, so in our analysis the equity lost increased the annual cost of owning, dramatically increasing the cost of homeownership on a cumulative basis until house price growth turned positive again in 2012. Since then, house prices have increased annually every year, with exceptionally strong growth in the pandemic era. The net impact has been a cumulative wealth-generating benefit of $169,000.  While the owner gained nearly $170,000 in equity due to appreciation, a renter spent over $229,000 in rent over the same period.


Average Tenure Length – Homes Purchased in 2014 to Current: $225,000

For someone who purchased a home 10 years ago, which is approximately the average tenure length for a homeowner in the U.S. in recent years, the wealth-generating benefit was even greater at nearly $225,000, because house prices have not declined annually in that time. A renter over that same time period cumulatively lost $148,000. 


Homes Purchased Just Prior to the Pandemic in 2019 to Current: $158,000

For someone who purchased a home in 2019, just before the pandemic hit and the housing market turned red hot, the wealth-generating benefit was approximately $158,000. A renter over that same time period cumulatively lost $89,000. 

Don’t Forget the Equity

While market conditions are important, the decision to buy a home is ultimately personal and should be based on both financial and lifestyle needs. Nonetheless, this analysis demonstrates that the wealth-building effect of home equity is a powerful factor in the homeownership decision. When your home, in the long run, pays you, it makes more sense to buy than to rent.

Sources:

•    First American Data & Analytics
•    Freddie Mac
•    Census Bureau

September 2024 Real House Price Index Highlights

The First American Data & Analytics’ Real House Price Index (RHPI) showed that in September 2024:

• Real house prices decreased 3.1 percent between August 2024 and September 2024. 
  
  
• Real house prices decreased 9.2 percent between September 2023 and September 2024.
  
  
• Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, increased 3.7 percent between August 2024 and September 2024, and increased 14.5 percent year over year.
  
  
• Median household income has increased 3.1 percent since September 2023 and 57.2 percent since January 2014.
  
  
• Real house prices are 27.8 percent more expensive than in January 2000.
  
  
• Unadjusted house prices are now 61.5 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 10.7 percent below their 2006 housing boom peak. 

September 2024 Real House Price State Highlights

• There were no states with a year-over-year increase in the RHPI.
  
  
• The five states with the greatest year-over-year decrease in the RHPI are: Colorado (-15.8 percent), Oregon (-15.1 percent), Hawaii (-13.5 percent), Arizona (-13.3 percent), and Florida (-12.6 percent).

September 2024 Real House Price Local Market Highlights

• Among the Core Based Statistical Areas (CBSAs) tracked by First American Data & Analytics, the only market with a year-over-year increase in the RHPI is Louisville, Ky. (+1.2 percent).
  
  
• Among the Core Based Statistical Areas (CBSAs) tracked by First American Data & Analytics, the five markets with the greatest year-over-year decrease in the RHPI are: Tampa, Fla. (-16.9 percent), Raleigh, N.C. (-16.7 percent), San Francisco (-16.3 percent), Portland, Ore. (-16.3 percent), and Denver (-15.2 percent).

Next Release

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of November 25, 2024.

About the First American Data & Analytics’ Real House Price Index

The traditional perspective on house prices is fixated on the actual prices and the changes in those prices, which overlooks what matters to potential buyers - their purchasing power, or how much they can afford to buy. First American Data & Analytics’ proprietary Real House Price Index (RHPI) adjusts prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow.

The RHPI uses a weighted repeat-sales house price index that measures the price movements of single-family residential properties by time and across geographies, adjusted for the influence of income and interest rate changes on consumer house-buying power. The index is set to equal 100 in January 2000. Changing incomes and interest rates either increase or decrease consumer house-buying power. When incomes rise and mortgage rates fall, consumer house-buying power increases, acting as a deflator of increases in the house price level. For example, if the house price index increases by three percent, but the combination of rising incomes and falling mortgage rates increase consumer buying power over the same period by two percent, then the Real House Price index only increases by 1 percent. The Real House Price Index reflects changes in house prices, but also accounts for changes in consumer house-buying power. 
 

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. © 2024 by First American. Information from this page may be used with proper attribution.