The rising prices are fueled by two dynamics that were in place before the pandemic — millennials aging into homeownership and low mortgage rates — and one that’s been exacerbated by the pandemic: plunging inventory.
“Mortgage rates were falling before the pandemic, and just last week they fell below 3 percent for the first time ever,” Mark Fleming, the chief economist at First American, said in a statement. “Demographic demand from millennials aging into their prime homeownership years continues to benefit housing as well. Both of these dynamics help boost demand.”
The housing market was already tight heading into the pandemic, but the supply of homes has now reached record lows and continues to move even lower, according to Fleming.
“The housing market amid the pandemic faces a significant supply and demand imbalance, and the result is accelerating price appreciation,” Fleming said. “In fact, based on current trends, we expect house price appreciation nationally to remain strong, and even accelerate in many markets this summer.”
But despite the rise in home prices, First American’s Real House Price Index (RHPI) shows that homes are actually getting more affordable at present, when you consider the change in income and interest rates.
RHPI decreased 0.3 percent from April 2020 to May 2020 and was down 7.3 percent from May 2019. Consumer homebuying power — a measure of how much one can buy based on income and interest rates — was up 15.9 percent year over year in May.
And while unadjusted house prices are 12.5 percent above their peak in 2006, the real house price index is 44.5 percent below that housing boom peak.
“We expect that house price appreciation will persist, and even accelerate, for the remainder of the summer,” Fleming said. “However, even assuming a 1 percent decline in household income (relative to May), a mortgage rate of 2.9 percent, and house price appreciation growth of 8.0 percent (compared with 7.4 percent in May), our RHPI would still be 2.4 percent lower than in May, meaning affordability would still improve.”
“Obviously, the pandemic continues to impact the labor market and economy, but our analysis indicates that potential buyers remain positioned to reap the benefit from the historically low rate environment.”
First American’s real price index, “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.”