Market Overview

The Top Five Cities for Consumer House-Buying Power, According to First American Real House Price Index

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—If house prices rise, but house-buying power rises further, are
homes less affordable?, asks 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 May 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.

May 2018 Real House Price Index

  • Real house prices increased 1.5 percent between April 2018 and May
    2018.
  • Real house prices increased 11.4 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in
    income and interest rates, declined 1.0 percent between April 2018 and
    May 2018, and declined 3.6 percent year over year.
  • Real house prices are 36.9 percent below their housing boom peak in
    July 2006 and 11.0 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 7.3 percent in May on a
    year-over-year basis and are 0.8 percent above the housing boom peak
    in 2006.

Chief Economist Analysis: Why Consumer House-Buying Power Matters

"The three key drivers of the RHPI
are household income levels, the 30-year, fixed mortgage rate, and the
unadjusted house price index. Changes to household income levels and the
30-year, fixed mortgage rate are considered together as consumer
house-buying power," said Mark Fleming, chief economist at First
American. "When household income rises and/or the mortgage rate falls,
consumer house-buying power increases."

The Bad News: Affordability Declined Year-Over-Year

"In May 2018, all three of the RHPI components increased compared with
the year before. The 30-year, fixed mortgage rate increased by 0.6
percent, and the unadjusted house price index increased by 7.3 percent,"
said Fleming. "Household income, which contributes positively to housing
affordability, also increased 3.2 percent since May 2017. The result
when you factor in all three influences – an 11.4 percent increase in
the Real House Price Index nationally and an increase in the RHPI in all
markets compared with a year ago."

The Good News: Consumer House-Buying Power is Up 23.6 percent since
2011

"Unadjusted house prices are 0.8 percent above the housing market peak
in 2006, and have been increasing since the end of 2011, nearly a
seven-year run. However, consumer house-buying power has also increased
by 55 percent since the housing boom peak in 2006 – that's 69 times the
increase in unadjusted house prices," said Fleming. "House-buying power,
how much one can buy based on household income and the 30-year,
fixed-rate mortgage rate, has benefited from a declining rate
environment, and slow, but steady household income growth. Nationally,
since the start of the nearly seven-year run of increasing unadjusted
house prices in 2011, house-buying power has increased 23.6 percent."

Top Five Cities for House-Buying Power

"But, real estate is local and house-buying power differs between
cities," said Fleming. "Using a city's annual median household income,
assuming that a household spends one-third of their income on a
mortgage, and considering the current 30-year, fixed-rate mortgage rate,
the five cities with the greatest consumer house-buying power in May
2018 are:

1.) San Jose, CA: $660,884

2.) Washington, DC: $633,093

3.) San Francisco, CA: $583,496

4.) Boston, MA: $509,520

5.) Seattle, WA: $486,574

House-Buying Power Outpaces Unadjusted House Price Growth

"Unsurprisingly, the top five cities coincide with the five cities with
the highest household income – make more (money) to buy more (house).
These cities also boast higher than national average household income
growth – 4.9 percent from May 2017 to May 2018," said Fleming.

"Since the housing market peak in 2006, household income has increased,
on average, 44.5 percent for these cities and the 30-year, fixed-rate
mortgage rate has fallen from 6.3 percent to 4.6 percent," said Fleming.
"As a result, average house-buying power across these five cities has
increased 74.7 percent since the housing market peak, considerably
outpacing the 22.5 percent growth in unadjusted house prices. If house
prices rise, but house-buying power rises further, are homes less
affordable?

"When house prices are adjusted for consumer house-buying power, the
‘real' level of house prices becomes more apparent. Nationally, real,
consumer house-buying power-adjusted house prices (RHPI) today remain
36.9 percent below their peak, and 11.0 percent below their level in the
year 2000," said Fleming. "Across the five markets with the highest
house-buying power, real, consumer house-buying power-adjusted house
prices (RHPI) today remain 31.3 percent below the housing market peak,
but are 8.2 percent above their level in the year 2000. Why are house
prices in these coastal markets so much higher than the national level?
Because home buyers have the income to afford them."

May 2018 Real House Price State Highlights

  • The five states with the greatest
    year-over-year increase in the RHPI are:
    Nevada (+18.8 percent), New Hampshire (+17.2 percent), New York (+17.0
    percent), Delaware (+16.5 percent) and Ohio (+16.2 percent).
  • No state had a year-over-year decrease in
    the RHPI in May.

May 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:
    San Jose, Calif. (+25.6 percent), Cleveland (+22.6 percent), Las Vegas
    (+22.2 percent), Jacksonville, Fla. (+17.4 percent), and Columbus,
    Ohio (+17.1 percent).
  • No CBSA had a year-over-year decrease in
    the RHPI in May.

Next Release

The next release of the First American Real House Price Index will take
place the week of August 27, 2018 for June 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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