Market Overview

Price Appreciation May Have Reached Tipping Point, According to First American Real House Price Index

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—We're seeing the first indications that price appreciation may be
slowing, but the underlying fundamental housing market conditions
support a natural moderation of house prices rather than a sharp
decline, 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 June 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.

June 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: Today's Housing Market is Different Than
Previous Housing Boom

"House price appreciation remains on a tear, as unadjusted home prices
nationwide increased by 7.3 percent compared with a year ago and are now
1.3 percent above the housing boom peak in 2006, according to DataTree
by First American
," said Mark Fleming, chief economist at First
American. "The U.S. economy continues to perform well, as the current
economic expansion reaches record
levels
, prompting some to ponder when it will end.

"It's no secret the housing market played a central role in the last
recession, so many may expect history to repeat," said Fleming.
"However, the housing market today is very different from the housing
market during the previous housing boom."

What's Different Now?

"The price appreciation experienced in the housing market during the
mid-2000s was characterized by a surge in demand driven by wider access
to mortgage financing. Price appreciation in today's housing market is
characterized by a shortage of supply," said Fleming. "The supply of
homes on the market remains extremely
low
, and the homes that hit the market sell
very quickly
– an indication that demand is outpacing supply.

"The low inventory, combined with income and employment growth, tighter
mortgage underwriting
, and strong economic fundamentals, fuels price
appreciation that is very different than the price appreciation during
the housing boom that peaked in 2006," said Fleming. "Today, house
prices are rising because of a
lack of supply of homes for sale
, near
record low mortgage rates
and the strong underlying economic
fundamentals of the second longest expansion in U.S. history."

Consumer House-Buying Power Stronger Today than Previous Housing Boom
Years

"While unadjusted house prices are 1.3 percent above the housing market
peak in 2006, consumer house-buying power has increased by 55 percent
over the same time period. House-buying power, how much one can buy
based on household income and the 30-year, fixed-rate mortgage, has
benefited from a declining rate environment, and slow, but steady
household income growth," said Fleming. "Consumers buy homes based on
how much it costs each month to make a mortgage payment, not the price
of the home. Lower mortgage interest rates and growing incomes mean home
buyers can afford to borrow more and buy more, which drives price
appreciation.

"In fact, after considering changes to household income levels and the
30-year, fixed-rate mortgage, our Real
House Price Index (RHPI)
shows that consumer house-buying
power-adjusted house prices are 36.9 percent below their housing boom
peak in July 2006 and remain 11.0 percent below the level of prices in
January 2000," said Fleming.

Has House Price Appreciation Reached a Tipping Point?

"Real estate markets tend to move in cycles, but they do not always end
in a housing bust. As rising prices and modestly rising mortgage rates
undermine affordability and buyers struggle to find something to buy
with so little for sale, it's natural to see some moderation in price
appreciation," said Fleming. "In fact, we are already beginning to see
cooling in some markets. According to our RHPI, 21 markets experienced a
monthly decline in their RHPI levels in June, which is the largest
number of markets to see declines since September 2017. The five cities
with the greatest month-over-month decrease in their RHPI levels in June
2018 were Pittsburgh (-2.0 percent), Raleigh, N.C. (-0.5 percent),
Charlotte, N.C. (-0.5 percent), Riverside, Calif. (-0.4 percent) and
Minneapolis (-0.4 percent).

"As buyers pull back from the market and sellers adjust their price
expectations, house prices will adjust, but the strong economic
conditions and the shortage of supply relative to demand continue to
support the housing market," said Fleming. "We're seeing the first
indications that price appreciation may be slowing, but the underlying
fundamental housing market conditions support a natural moderation of
house prices rather than a sharp decline."

June 2018 Real House Price State Highlights

  • The five states with the greatest
    year-over-year increase in the RHPI are:
    Nevada (+21.0 percent), Ohio (+18.5 percent), New York (+18.3
    percent), Michigan (+17.5 percent), and New Hampshire (+17.2 percent).
  • No state had a year-over-year decrease in
    the RHPI in June.

June 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. (+25.0 percent), Cleveland (+24.5 percent), Las Vegas
    (+24.5 percent), Jacksonville, Fla. (+19.0 percent), and Charlotte,
    N.C. (+18.8 percent).
  • No CBSA had a year-over-year decrease in
    the RHPI in June.

Next Release

The next release of the First American Real House Price Index will take
place the week of September 24, 2018, for July 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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