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First American Financial Corporation's December 2020 Real House Price Index reported that while house prices are rising at a rapid rate, housing markets are still undervalued. Additionally, house-buying power continues to exceed the median sale price which implies that housing is not overvalued today, according to First American's chief economist, Mark Fleming.
According to the press release, real house prices increased 0.5% between November 2020 and December 2020. On a year-over-year basis, real home prices declined by 7.2% from December 2019 to December 2020. Meanwhile, consumer house-buyer power, which refers to how much a buyer can purchase based on changes in income and interest rates, increased 1.1% between November 2020 and December 2020, with a 21.1% increase year-over-year. First American's report also noted that median household income has increased 6.2% since December 2019 and 72.9% since January 2000.
"Punxsutawney Phil may have signaled six more weeks of winter, but in housing, it looks like spring (home buying) has already arrived. Typically, the housing market winds down a bit in the winter, but America’s housing market is booming, even in the colder months. The First American Data and Analytics nominal house price index indicates unadjusted home prices nationwide increased by 12.4% in December compared with one year ago and are nearly 21% above the housing boom peak in 2006," said Fleming. "While nominal prices have risen, house-buying power has grown even faster, increasing 21% year-over-year due to historically-low rates and still rising incomes for those employed. Even though purchasing power is outpacing price appreciation, the rapid rise in house prices does prompt fears of a repeat of the 2008 crisis, even among some in the housing industry. But last time was different.
"The housing market today is not the same as the housing market during the bubble years. Most importantly, today’s housing market is not overvalued. Considering only the nominal level of house prices is not sufficient to determine whether the market is overvalued or not. Lower mortgage interest rates and rising incomes correspond with higher house prices as home buyers can afford to borrow and buy more," added Fleming. "If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded house-buying power in 2006 nationally, but today house-buying power is nearly twice as high as the median sale price nationally. Of course, real estate is local and not all markets are created equal."
According to the report, among the Core Based Statistical Areas tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Cleveland (+3.0%), Memphis, Tenn. (+2.1%), Kansas City, Mo. (+1.6%), Tampa, Fla. (+1.2%), and Hartford, Conn. (+0.6%). Meanwhile, the five markets with the greatest year-over-year decrease in the RHPI are: San Francisco (-18.6%), San Jose, Calif. (-15.5%), Boston (-13.7%), Miami (-12.6%), and San Diego (-11.4%). From this data, many of the top housing markets remain undervalued with just a few exceptions.
"Of the top 50 markets tracked, only three markets, all located in California, were overvalued, meaning the median existing-home sale price exceeded house-buying power, in December. The market with the highest overvaluation was Los Angeles, where the median consumer house-buying power in December was just over $590,000, significantly below the median sale price of a home at approximately $729,000," said Fleming. "San Francisco and San Jose were also overvalued, although to a lesser extent. However, all three overvalued markets are still significantly less overvalued than during the national housing boom peak in March 2006. Los Angeles, for example, was overvalued by approximately $286,000 in 2006, more than twice what it is today. The remaining 47 markets are actually undervalued, many significantly so. In fact, in December 2020, the average percentage difference between house-buying power and the median sale price of an existing home in these 47 markets was nearly 59%. In 2006, only 34 markets were considered undervalued, and the average percentage difference between house-buying power and the median sale price of an existing home was 39%. Even locally, this time it’s different.
Fleming is predicting even more house price growth once the spring buying season hits.
"The First American Data & Analytics preliminary nominal house price index anticipates continued strengthening of house price appreciation through February. As the housing market heads into the spring homebuying season, the ongoing supply and demand imbalance all but assures more house price growth," said Fleming. "During the housing bubble, rapid house price appreciation was not entirely supported by economic fundamentals, but in today’s housing market, nominal house price appreciation has been driven by a historic shortage of supply relative to demand and rate-driven surge in house-buying power. Many find it hard to believe, but housing is actually undervalued in most markets and the gap between house-buying power and sale prices indicates there’s room for further house price growth in the months to come."
Click here to learn more from First American's Real House Price Index report.