Housing Market Nearly Overvalued Nationally, According to First American

05/02/2024 Hanna

Whether affordability drifts over or under in the coming months will depend on whether the supply-tightening response to higher rates is stronger or weaker than the demand-softening response, says First American Chief Economist Mark Fleming

SANTA ANA, Calif., – First American Data & Analytics, a leading national provider of property-centric information, risk management and valuation solutions and a division of First American Financial Corporation (NYSE: FAF) released the March 2024 First American Data & Analytics’ 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: Affordability Dips 5 percent Year Over Year

“In March 2024, mortgage rates increased and affordability fell modestly by 0.1 percent compared with February, according to the Real House Price Index (RHPI). On an annualized basis, affordability decreased by approximately 5 percent,” said Mark Fleming, chief economist at First American. “Two factors drove the year-over-year decline in affordability – a 6.2 percent annual increase in nominal house prices, according to our First American Data & Analytics House Price Index, and a 0.3 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago.

“For home buyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income,” said Fleming. “Even though household income increased 3.7 percent since March 2023 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and rising nominal prices.

“In March, the median-income household nationally could afford to buy a house for no more than $350,000, assuming that the buyer put down a 5% down payment, their mortgage rate was the average rate for the month of March, and their mortgage payments take up one-third of their pre-tax income. But the median sale price of an existing home in March, according to data from First American Data & Analytics, was also approximately $350,000,” said Fleming. “If housing is appropriately valued, house-buying power should equal or exceed the median sale price of a home. At a national level, the housing market is neither overvalued nor undervalued by this metric. The housing market was considered overvalued from June through November of last year, then modestly undervalued until March, when the median sales price and house-buying power equalized. However, examining this metric at the market level paints a more affordable picture.”

What’s the Over-Under?

“Of the top 50 markets tracked, 22 markets were overvalued in March, meaning the median existing-home sale price exceeded house-buying power. The number of overvalued markets has increased since our last analysis of overvalued markets in July 2022, when just 15 market were considered overvalued. The market with the highest overvaluation was San Jose, Calif., where the median consumer house-buying power in March was $723,000, significantly below the median sale price of a home at $1,430,000,” said Fleming. “In markets considered overvalued, the chronic housing supply shortage is preventing prices from adjusting downward enough to reflect the affordability reality. Additionally, house prices are “downside sticky.” Home sellers would rather withdraw from the market than sell at lower prices.

“The good news is that most of the markets we track remain undervalued by this measure, and nine markets were undervalued by $100,000 or more,” said Fleming. “Detroit, Philadelphia, and Cleveland are markets considered undervalued by an average of $145,000.”

The Impact of ‘Higher-For-Longer’

“Reducing overvaluation can occur through lower house prices, lower mortgage rates, fast-rising incomes, or some combination of the three. As ‘higher-for-longer’ mortgage rates are increasingly likely, sellers have less incentive to sell, keeping inventory short and, all else equal, pushing prices higher. But that’s only half the story in a ‘higher-for-longer’ world,” said Fleming. “House-buying power is also reduced, which can soften demand, so it’s not a certainty that prices continue to march upward. Whether affordability drifts over or under in the coming months will depend on whether the supply-tightening response to higher rates is stronger or weaker than the demand-softening response.”

March 2024 First American Data & Analytics’ Real House Price Index Highlights

Real house prices increased 0.1 percent between February 2024 and March 2024.

Real house prices increased 5.3 percent between March 2023 and March 2024.
Consumer house-buying power, how much one can buy based on changes in income and mortgage rates, decreased 0.1 percent between February 2024 and March 2024, and increased 0.8 percent year over year.
Median household income has increased 3.7 percent since March 2024 and 90.2 percent since January 2000.

Real house prices are 42.5 percent more expensive than in January 2000.
Unadjusted house prices are now 58.3 percent above the housing boom peak in 2006, while real, house-buying power-adjusted house prices are 0.3 percent below their 2006 housing boom peak.

March 2024 Real House Price State Highlights

The five states with the greatest year-over-year increase in the RHPI are: West Virginia (+14.7 percent), New Mexico (+14.6 percent), New Jersey (+14.0 percent), Massachusetts (+13.2), and Indiana (+12.6 percent).
The states with a year-over-year decrease in the RHPI are: Washington, D.C. (-2.3 percent) and Colorado (-0.3 percent).

March 2024 Real House Price Local Market Highlights

Among the Core Based Statistical Areas (CBSAs) tracked by First American Data & Analytics, the five markets with the greatest year-over-year increase in the RHPI are: Memphis, Tenn. (+17.7 percent), Boston (+16.3 percent), Providence, R.I. (+15.0 percent), Buffalo, N.Y. (+14.6 percent), and Cincinnati (+14.3 percent).
Among the Core Based Statistical Areas (CBSAs) tracked by First American Data & Analytics, the two markets with a year-over-year decrease in the RHPI are: Denver (-1.4 percent) and Portland, Ore. (-0.3 percent).

Next Release

The next release of the First American Data & Analytics’ Real House Price Index will take place the week of May 20, 2024.

Sources

Methodology

The methodology statement for the First American Data & Analytics’ 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. © 2024 by First American. Information from this page may be used with proper attribution.

About First American Data & Analytics

First American Data & Analytics, a division of First American Financial Corporation, is a national provider of property-centric information, risk management and valuation solutions. First American maintains and curates the industry’s largest property and ownership dataset that includes more than 8 billion document images. Its major platforms and products include: DataTree^®, FraudGuard^®, RegsData^®, First American TaxSource™ and ACI^®. Find out more about how First American Data & Analytics powers the real estate, mortgage and title settlement services industries with advanced decisioning solutions at www.FirstAmDNA.com.

About First American

First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 135 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $6.0 billion in 2023, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2024, First American was named one of the 100 Best Companies to Work For by Great Place to Work^® and Fortune Magazine for the ninth consecutive year. The company was named one of the 100 Best Workplaces for Innovators by Fast Company in 2023. More information about the company can be found at www.firstam.com.