According to the Real House Price Index (RHPI), which measures housing affordability in the context of changes in consumer house-buying power, affordability in September declined to its lowest level since 2008. Two of the three components of consumer house-buying power swung toward declining affordability. Record nominal house price growth and rising mortgage rates outpaced the growth in household income. The 30-year, fixed mortgage rate and the unadjusted house price index increased by 0.01 percentage points and 20.9 percent, respectively on a year-over-year basis. Even though household income increased 3.0 percent since September 2020 and boosted consumer house-buying power, the RHPI increased 17.5 percent compared with last September, the highest yearly growth rate since 2014.
“It may be hard to believe but, once adjusted for consumer house-buying power, housing is undervalued in most markets and the gap between house-buying power and median sale prices indicates there remains room for continued house price growth.”
Affordability is Falling, But is Housing Overvalued?
Annual nominal house price growth in September remained near record levels and affordability declined, but the housing market is not overvalued. Historically low mortgage rates and rising incomes have allowed home buyers to borrow more, giving them the ability to bid up house prices. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. In September, house-buying power was more than $170,000 above the median sale price nationally, indicating that the housing market may even be undervalued. Of course, real estate is local, but even at the market level, consumer house-buying power exceeds the median home price in most markets.
In the chart below, home buyers in markets below the line have house-buying power that is greater than the median house price in their market – meaning houses are relatively more affordable in these markets and undervalued relative to house-buying power. Home buyers in markets above the line have house-buying power that is less than the median house price in their market – indicating houses in these markets are relatively less affordable and overvalued relative to house-buying power.
Only four of the 50 markets we track had a median sale price that exceeded house-buying power in September, and they’re all coastal cities in California. Yet, housing markets generally considered expensive, like Seattle, Washington, D.C., and Boston, are more affordable than many believe. The list below shows the top 10 most expensive markets, as measured by median sale price. The reason many other expensive markets are more affordable is due to high household incomes – the more you earn, the more you pay. High household incomes in combination with historically low mortgage rates fuels strong house-buying power, which in many markets remains above the median sale price of a home.
Where Does the Housing Market Go from Here?
The First American Data & Analytics preliminary nominal house price index indicates slowing annual house price growth in October, as declining affordability causes some potential buyers to pull back from the market and sellers to adjust their price expectations. Yet, as the housing market heads into the end of the year, the ongoing supply and demand imbalance will continue to put upward pressure on house price growth. It may be hard to believe but, once adjusted for consumer house-buying power, housing is undervalued in most markets and the gap between house-buying power and median sale prices indicates there remains room for continued house price growth.
September 2021 Real House Price Index Highlights
The First American Real House Price Index (RHPI) showed that in September 2021:
- Real house prices increased 1.7 percent between August 2021 and September 2021.
- Real house prices increased 17.5 percent between September 2020 and September 2021.
- Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.2 percent between August 2021 and September 2021, and increased 2.9 percent year over year.
- Median household income has increased 3.0 percent since September 2020 and 66.2 percent since January 2000.
- Real house prices are 9.4 percent less expensive than in January 2000.
- While unadjusted house prices are now 38.4 percent above the housing boom peak in 2006, real, house-buying power-adjusted house prices remain 36.4 percent below their 2006 housing boom peak.
September 2021 Real House Price State Highlights
- The five states with the greatest year-over-year increase in the RHPI are: Arizona (+28.9 percent), South Carolina (+22.0 percent), Florida (+21.5), Nevada (+21.2), and Georgia (+20.4 percent).
- There were no states with a year-over-year decrease in the RHPI.
September 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: Phoenix (+30.1 percent), Charlotte, N.C. (+27.4), Jacksonville, Fla. (+26.2 percent), Tampa, Fla. (+25.5 percent), and Memphis, Tenn. (+22.4 percent).
- Among the Core Based Statistical Areas (CBSAs) tracked by First American, there were no markets with a year-over-year decrease in the RHPI.
About the First American 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’s 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.
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.