Key Points:

• Preliminary data from June and July indicate that affordability on an annual basis has improved for six consecutive months.
  
  
• Despite slowing price growth nationally, national house prices are unlikely to experience a significant and sustained decline.
  
  
• Tighter lending standards, stronger credit quality, significant equity cushions and a structural housing shortage make this housing cycle unique from the last one.

Affordability across the nation improved by 4.4 percent annually in May, driven by falling mortgage rates, slowing nominal house prices, and rising household incomes. Preliminary national data from June and July indicates affordability has continued to improve, reaching a level last seen in October 2024 and marking a 10 percent increase in affordability from the recent low point in October 2023. Although affordability remains historically low, the modest rebound is encouraging for potential buyers.

The improvement in affordability is partly due to the deceleration of house prices. Nominal house price growth has slowed to single digits and, in May, prices declined or price growth was under 1 percent in nearly half of the 50 markets we monitor. The market with the most severe annual price drop was San Francisco, where house prices declined by nearly 7 percent year over year. With memories of the double-digit house price declines during the Global Financial Crisis (GFC) still fresh for many, it’s easy to understand why some believe today’s housing market may be on the cusp of a potential house price crash. However, today’s housing market is markedly different than the one that preceded the GFC. And, while real estate markets tend to move in cycles, not every housing boom ends in a housing bust.

 "Not every housing boom ends in a housing bust."

This Time is Different…Really

A housing bubble occurs when home prices and construction surge due to artificial demand, such as speculative behavior or lax loan underwriting standards. The housing market played a pivotal role in the GFC. Charting house prices over time shows two significant price spikes—one during the mid-2000s that preceded the GFC and another during the pandemic. The economic pain of the GFC and steep declines in house prices left enduring scars for many, and there’s a natural inclination to expect a similar outcome for today’s housing market following the pandemic boom. 

However, the characteristics of the current housing market cycle differ significantly from the previous housing boom:

Artificial Demand vs. Supply Squeeze: The price appreciation in the housing market during the mid-2000s was driven by a surge in demand due to wider access to mortgage financing. Teaser rates, fixed-to-ARM loan structures, and other financial products allowed borrowers to secure larger loans at the same monthly payments, which boosted demand and, in turn, fueled surging home values.

In contrast, price appreciation in the pandemic boom was driven by a shortage of supply and a release of pent-up demand. Amid the tight inventory levels, millennials, the largest generation in history, entered their prime home-buying years. This wave of millennial home buyers were armed with record-low mortgage rates and the new-found freedom to work remotely, spurring demand and price appreciation during the pandemic era, a very different set of conditions than the housing boom housing boom that peaked in 2006.

We Didn’t Build it, and People Still Came: The housing sector has been underbuilt for over a decade, leading to a structural housing shortage. Since 2009, annual household growth has consistently exceeded new housing units added, whereas before 2009, the amount of new housing units added per year exceeded annual household growth¹. This cumulative supply-demand gap created the perfect story for rapid house price appreciation during the pandemic boom years. Although inventory has increased this year, helping soften house prices, it remains below historical levels, especially in some regions such as the Northeast and Midwest.

Don’t Forget the Equity: While equity dipped slightly in the third and fourth quarters of 2024 and the first quarter of 2025, it remains near historical highs, down only 3 percent from the peak reached in the second quarter of 2024. Large equity buffers help homeowners withstand financial challenges. During the GFC, the housing crisis was exacerbated by job losses and a significant share of homeowners lacking equity in their homes. Currently, homeowners have substantial levels of tappable home equity, providing a cushion against potential price declines and reducing the risk that housing distress will lead to foreclosure. If distressed homeowners need to resolve delinquency, their equity buffers make involuntary sales more likely than foreclosures. Additionally, the national loan-to-value ratio is just 28 percent, below the pre-pandemic five-year average and well below the level of approximately 50 percent in 2008, indicating a healthier financial environment. 

Loan and Borrower Quality Matters: Today's housing market is characterized by stronger borrower profiles and more conservative loan structures than those leading up to the GFC. On the loan side, risky products, like negatively amortizing loans or no-document mortgages are far less common today. Mortgage credit availability remains constrained, indicating that it’s still harder to qualify for a mortgage than during the pre-pandemic period, according to the Urban Institute’s Housing Credit Availability Index. The Urban Institute report indicates that tighter credit standards from the third quarter to the fourth quarter of 2024 reflect a decline in default risk. The median credit score of borrowers approved for mortgages reached 772 in the first quarter of 2025. While this is lower than the pandemic-era highs, it is higher than the early 2000s.

Not all Housing Booms End in a Housing Bust

In today’s environment of elevated mortgage rates and economic uncertainty, buyers are pulling back and sellers are adjusting their price expectations, so house prices naturally are softening. However, the structural shortage of supply relative to demand will put a floor on how low prices can go. While there will be significant regional variation, the underlying fundamental conditions of the national housing market support a natural moderation of house prices rather than a sharp decline.

Sources:

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

May 2025 Real House Price Index Highlights

The First American Data & Analytics’ Real House Price Index (RHPI) showed that in May 2025:

• Real house prices decreased 4.4 percent between May 2024 and May 2025.
  
  
• Real house prices increased 0.6 percent between April 2025 and May 2025.
  
  
• Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 0.5 percent between April 2025 and May 2025, and increased 6.7 percent year over year.
  
  
• Median household income has increased 4.0 percent since May 2024 and 57.8 percent since January 2015.
  
  
• Real house prices are 33.9 percent more expensive than in January 2000.
  
  
• Unadjusted house prices are now 63.4 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 6.2 percent below their 2006 housing boom peak. 

May 2025 Real House Price State Highlights

• The five states with the greatest year-over-year increase in the RHPI are: South Dakota (+7.3 percent), Maine (+3.3 percent), New Hampshire (+2.8 percent), Connecticut (+1.8 percent), and North Dakota (+1.2 percent).
  
  
• The five states with the greatest year-over-year decrease in the RHPI are: Florida (-11.2 percent), Montana (-9.9 percent), Wyoming (-9.6 percent), Texas (-8.8 percent), and Nevada (-8.8 percent).

May 2025  Real House Price Local Market Highlights

• Among the Core Based Statistical Areas (CBSAs) tracked by First American Data & Analytics, the five markets with the greatest year-over-year increase in the RHPI are: Hartford, Conn. (+4.8 percent), Milwaukee (+3.2 percent), Louisville, Ky. (+2.6 percent), Philadelphia (+1.0 percent), and Cincinnati (+0.5 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. (-14.8 percent), Miami (-14.2 percent), Seattle (-13.6 percent), San Francisco (-13.6 percent), and Orlando, Fla. (-10.8 percent).

Next Release

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of August 25, 2025.

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. © 2025 by First American. Information from this page may be used with proper attribution.

^{[1] Two-year average of annual household growth.}