—Recent history has shown that in times of economic distress, lower mortgage rates have offset the affordability drag from faster house price appreciation and lower household income, says Chief Economist Mark Fleming—
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 July 2020 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.
Chief Economist Analysis: Falling Rates, Rising Income Offset Nominal House Price Appreciation in July
“Affordability improved in July as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of increased affordability, outpacing the rise in nominal house price appreciation. The average 30-year, fixed mortgage rate fell by 0.75 percentage points and household income increased 5.5 percent compared with July 2019,” said Mark Fleming, chief economist at First American. “Declining mortgage rates and rising household income levels both increase consumer house-buying power. So, even though nominal house price appreciation jumped 8.2 percent annually in July, it was not enough to offset the affordability boost from declining rates and rising household income.
“While there remains debate regarding the actual end date of the 2020 recession, there is no argument that the economic pain inflicted by the coronavirus continues to linger. Yet, housing affordability nationally has improved, and the housing market remains resilient,” said Fleming. “But, how have nominal house prices and affordability fared in previous economic declines and what can that tell us about today’s housing market?”
How Nominal House Prices Fare During Recessions
“We examined how nominal house prices and the RHPI reacted to the four most recent recessions, including the current pandemic-driven economic downturn,” said Fleming. “It is important to note that a declining RHPI trend line indicates improving affordability, and a rising RHPI trend line signals worsening affordability.
“With the exception of the Great Recession in 2008-2009 and a modest decline in the 1990 recession, nominal house prices have remained flat or risen slowly, but have not declined,” said Fleming. “This demonstrates the ‘downside stickiness’ of house prices during economic decline. In the pandemic-driven recession of 2020, we’ve seen house price appreciation grow faster than in any of the economic declines in our recent past.
“This phenomenon of continued house price appreciation amid economic decline is unique to the housing market because sellers tend to withdraw supply to wait out the economic storm, rather than sell at lower prices,” said Fleming. “During the Great Recession, house prices declined because of a flood of foreclosures and distressed selling, which were a product of rapid house price appreciation not entirely supported by economic fundamentals. In today’s market, nominal house price