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Historical Data Shows House Prices Resilient to Rising Rates, According to First American Real House Price Index – Business Wire


SANTA ANA, Calif.–(BUSINESS WIRE)–First
American Financial Corporation
(NYSE: FAF), a leading
global provider of title insurance, settlement services and risk
solutions for real estate transactions, today released the October 2018 First
American Real House Price Index (RHPI)
. The RHPI measures the price
changes of single-family properties throughout the U.S. adjusted for the
impact of income and interest rate changes on consumer house-buying
power over time at national, state and metropolitan area levels. Because
the RHPI adjusts for house-buying power, it also serves as a measure of
housing affordability.

October 2018 Real House Price Index

  • Real house prices increased 2.9 percent between September 2018 and
    October 2018.
  • Real house prices increased 16.2 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in
    income and interest rates, decreased 1.9 percent between September
    2018 and October 2018, and declined 7.7 percent year over year.
  • Average household income has increased 3.0 percent since October 2017
    and 53.7 percent since January 2000.
  • Real house prices are 35.5 percent below their housing boom peak in
    August 2006 and 9.0 percent below the level of prices in January 2000.

Chief Economist Analysis: How a Strong Economy Can Slow the Housing
Market

“For the second consecutive month, all three key drivers of the Real
House Price Index
(RHPI), household income, mortgage rates, and the
unadjusted house price index, increased compared with a year ago,” said
Mark Fleming, chief economist at First American. “The 30-year,
fixed-rate mortgage and the unadjusted house price index increased by
0.9 percentage points and 7.3 percent respectively. Even though
household income increased 3.0 percent since October 2017 and boosted
consumer house-buying power, the Real House Price Index increased 16.2
percent compared with last October, the highest yearly growth rate since
2014.

“In 2018, the housing market has largely been a victim of the economy’s
success. The Federal Reserve is trying to keep inflation in check by
increasing short-term interest rates and reducing their holdings of
Treasury bonds and mortgage-backed securities,” said Fleming. “The Fed’s
moves have pressured mortgage rates higher and made buying a home more
expensive. Meanwhile, the healthy
economy and robust labor market
in 2018 has supported home buyer
demand.

Rising
mortgage rates impact both housing supply and demand
, limiting
supply by reducing the propensity of sellers to sell and flattening
demand by reducing consumer house-buying power,” said Fleming. “For home
buyers, the only way to mitigate the loss of affordability caused by a
higher mortgage rate is with an equivalent, if not greater, increase in
household income.

“The increase in mortgage rates since last October has reduced
house-buying power by $41,000. Over the same period, household income
growth increased consumer house-buying power by nearly $11,000. The net
result is overall consumer house-buying power fell by $30,000 in October
compared with a year ago,” said Fleming. “At the moment, rising mortgage
rates are winning the buying power tug-of-war with rising household
incomes – the pace of household income growth is not sufficient to fully
offset the change in mortgage rates.”

Do Rising Mortgage Rates Always Lead to Falling House Prices?

“Increasing mortgage rates have been a defining feature of the 2018
housing market. Many people may expect house prices to decline when
rates rise, but their effect on home prices may not be as
straightforward as you think,” said Fleming.

“We analyzed unadjusted house prices in seven rising mortgage rate eras
over the past 25 years. The trend is clear – house prices are resistant
to rising mortgage rates,” said Fleming. “Apart from the 1993-94
rising-rate period, when house prices declined slightly and briefly,
they have always ended the rising-rate era higher than when it started.

“In the longest rising mortgage rate era, 1998-2000, nominal house
prices increased nearly 15 percent in just 19 months as the economy
expanded rapidly,” said Fleming. “At the time, the economy was defined
by tight labor markets and low inflation, all contributing to a healthy
housing market
.

“Today, as mortgage rates increase, house prices are rising at a pace
similar to the 1998-2000 era. Over the last 13 months, nominal house
prices have increased by 8.0 percent,” said Fleming. “This compares to
the first 13 months of the 1998-2000 rising mortgage-rate era, when
house prices increased 8.4 percent.”

Economic Environment More Influential than Mortgage Rates

“The lesson? House prices are often resilient to rising mortgage rates,
but just how resilient depends on the economic environment. Ultimately,
rising interest rates are indicative of a growing economy, which
benefits consumers and increases home buyer demand,” said Fleming. “The
tug-of-war between rising mortgage rates and increasing household income
doesn’t necessarily mean that house prices will decline. In fact,
history tells us otherwise.”

October 2018 Real House Price State Highlights

  • The five states with the greatest
    year-over-year increase in the RHPI are:
    Ohio (+22.6 percent), Nevada (+22.2 percent), Georgia (+21.0 percent),
    New Hampshire (+20.7 percent), and New Jersey (+20.6 percent).
  • No state had a year-over-year decrease in
    the RHPI in October.

October 2018 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:
    Cleveland (+30.6 percent), Cincinnati (+24.8 percent), Las Vegas
    (+24.6 percent), San Antonio (+24.4 percent) and Atlanta (+22.7
    percent).
  • No CBSA had a year-over-year decrease in
    the RHPI in October.

Next Release

The next release of the First American Real House Price Index will take
place the week of January 28, 2019 for November 2018 data.

Methodology

The methodology statement for the First American Real House Price Index
is available at http://www.firstam.com/economics/real-house-price-index.

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. © 2018 by First
American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a leading
provider of title insurance, settlement services and risk solutions for
real estate transactions that traces its heritage back to 1889. First
American also provides title plant management services; title and other
real property records and images; valuation products and services; home
warranty products; property and casualty insurance; banking, trust and
wealth management services; and other related products and services.
With total revenue of $5.8 billion in 2017, the company offers its
products and services directly and through its agents throughout the
United States and abroad. In 2018, First American was named to the Fortune 100
Best Companies to Work For® list for the third consecutive
year. More information about the company can be found at www.firstam.com.

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