Blame COVID-19: despite an increase in consumer house-buying power and low interest rates, the price of single-family homes may have hit its apex for now because of lower inventory. Prices are declining month-over-month and year-over year, according to First American Financial Corporation’s Real House Price Index (RHPI). Real house prices decreased 1.6% between January 2020 and February 2020 and 5.8% between February 2019 and February 2020.
“As the coronavirus outbreak continues to affect the domestic and global economy, the housing market has shown that it is not immune to its impact. In March, the number of existing-home sales fell 8.5% relative to February, and the number of new listings continued to dwindle,” said Mark Fleming, chief economist at First American. “While mortgage rates have fallen due to the current economic uncertainty, stay-at-home orders have made it more difficult for potential home buyers to take advantage of the affordability boost, and first-time home buyers may have an even more difficult time as lenders have tightened credit availability. Despite all of the headwinds, homes continue to be bought and sold, but how will the changing dynamics of supply and demand impact house prices?”
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.
Consumer house-buying power (defined as how much one can buy based on changes in income and interest rates) increased 2.5% between January 2020 and February 2020, and increased 14.6% year over year. In February, Fleming said, two of the key drivers (rising hourly earnings and declining mortgage interest rates) of the RHPI had led to increased affordability. However, in March, the supply of homes for sale declined by 10.2% compared with one year ago.
“House prices were rising before the pandemic because of a lack of supply of homes for sale, strong demand fueled by near record low mortgage rates and the robust underlying economic fundamentals of what was the longest expansion in U.S. history until March 2020,” Fleming said. “As buyers and sellers pull back from the market and some sellers adjust their price expectations, it’s reasonable to expect a reduction in home sales and a moderation in house price appreciation in this year’s spring home-buying season. Yet, transactions will continue to occur. The housing market may be down, but it may be better positioned than many believe.”
