Early U.S. figures show real home prices rise more than 50% in one year

First American Financial Corp. released the First American Real House Price Index (RHPI) for July 2022, which shows that real house prices rose 53.8% year-over-year.

“Housing affordability continued its rapid annual decline in July 2022, as nominal house prices rose 16.7% year-over-year and the 30-year fixed mortgage rate increased by 2.5 percentage points from a year ago. The RHPI reflects the decline in affordability, as it jumped nearly 54% on an annual basis,” says Mark Fleming, chief economist at First American. “For homebuyers, there are few options to mitigate the loss of affordability caused by a higher mortgage rate and rising prices.”

Real house prices decreased by 0.9% between June 2022 and July 2022, but increased by 53.8% between July 2021 and July 2022. They are 28.7% more expensive than in January 2000.

“One way to compensate for declining affordability is to increase household income by an equivalent, if not greater, amount,” Fleming comments. “Another option is to choose an adjustable rate mortgage (ARM), which usually has a lower rate than a 30-year fixed rate mortgage. Even though household income and higher MRAs help increase consumer purchasing power, they are not enough to offset the loss in affordability due to higher rates and rapidly rising nominal prices in July.

Consumer purchasing power, i.e. the amount one can buy based on changes in income and interest rates, increased by 1.7% between June 2022 and July 2022, and decreased 24.1% year-over-year. Median household income has increased by 3% since July 2021 and by 76% since January 2000.

“As affordability declines, potential buyers pull out of the market, causing annual house price appreciation to moderate. Annual house price growth peaked in March at nearly 21%, but has slowed since to a still high 16.7% in July,” Fleming continued. “As the housing downturn continues, the pace of home price moderation will vary across markets, with prices decelerating faster in some markets than in others. By analyzing which markets are considered overvalued, we can identify markets at risk of a faster price deceleration.

While unadjusted house prices are now 55.1% above the peak of the 2006 housing boom, real house prices adjusted for purchasing power remain 9.3% below the peak of the 2006 housing boom.

“If housing is properly appraised, the buying power should be equal to or greater than the median selling price of a home,” says Fleming. “As of July, most of the top 50 markets we track remain undervalued by this metric, some significantly undervalued. For example, Detroit, Philadelphia and Pittsburgh are markets considered undervalued by nearly $200,000.

The five states with the largest year-over-year increases in the HRPI were Florida (+72.2%), South Carolina (+59.6%), Georgia (+59, 4%), North Carolina (+58.5%) and Vermont (+58.2%). %). No state recorded a year-over-year decline in the HRPI.

“However, real estate is local and not all markets are created equal. There were 15 markets considered overvalued in July, meaning the median selling price of existing homes exceeded the buying power of homes. A year ago, only four markets were considered overvalued,” adds Fleming. “San Jose, California was the most overvalued market. Median consumer spending power in San Jose in July was just over $770,000, just over half the median selling price of a home at $1,460,000. Therefore, the annual house price growth adjusts to San Jose. Price growth peaked at 19.4% in February 2022, but has since slowed rapidly to 4.6% in July – the second-fastest price deceleration among the top 50 markets we track, second only to Sacramento.

Of the basic statistical domains (CBSAs) tracked by First American, the five markets with the largest year-over-year increases in HRPI are Miami, Florida (+68.5%); Tampa, Florida (+67.3%); Charlotte, North Carolina (+65.1); Raleigh, North Carolina (+64.1%)); and Orlando, Florida (+62.5%). Of the Basic Statistical Domains (CBSAs) tracked by First American, no market saw a year-over-year decline in HRPI.

“The overvaluation was calculated based on July 2022 house prices and mortgage rates, but mortgage rates have since risen. If we hold household income and median selling prices constant at their July 2022 levels, increasing the average 30-year fixed mortgage rate from 5.4% in July to 6% in September increases the number of overvalued markets, adding San Antonio, Miami, Tampa, Florida and Salt Lake City to the list and bringing the total to 19,” says Fleming.

“Household overvaluation is a function of three factors: house prices, household income and mortgage rates. The preliminary nominal house price index from First American Data & Analytics indicates that the deceleration in house prices is likely to continue in September. Meanwhile, median household incomes are expected to continue to rise as the imbalance between supply and demand in the labor market persists, putting upward pressure on wages,” says Fleming. “While mortgage rates are expected to continue to climb over the next few months, much of the rapid rate increase is likely behind us. While markets seen as overvalued may have to adjust to the not-so-new reality of higher mortgage rates, housing market fundamentals still support a moderation in annualized house price appreciation rather than a sharp decline.

“Nationally, while month-to-month home prices may decline, year-over-year declines in home prices are not expected given the current imbalance of supply and demand and the continued strength of the labor market,” concludes Fleming. “Before the pandemic, the historical average for annual house price growth was just under 4%, as the market adjusts to a not-so-new normal pace of appreciation, some buyers who have pulled back due to the frenzy of super sellers ‘ the market could rebound.

The next release of the First American Real House Price Index will be the week of October 17, 2022 for August 2022 data.

Read the full report here.

Image: “Oak Terrace Preserve’s Walkable Neighborhoods” from North Charleston is licensed under CC BY-SA 2.0

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