Home Prices Are Up But Remain Far Below April 2006 Peak

Homes are less affordable than they were a year ago, but they largely remain more affordable than at the peak of the 2006 housing boom, according to First American Financial Corporation’s Real House Price Index.

In January, the RHPI rose 27% from the year prior, making it the fastest-growing RHPI – and fastest YOY decline in affordability – since 2004. This was driven by a 21.7% increase in home prices and a 0.7% rise in rates.

The RHPI measures price changes for single-family properties adjusted for the impact of income and interest rate changes on consumer house-buying power. As such, it also serves as a measure of affordability.

Household income was up 5% from January 2021, but that gain was overwhelmed by rapidly rising rates and home price appreciation. Mortgage rates rose more than a quarter of a percentage point last week alone, averaging 4.42%.

A year ago, rates averaged 3.17%.

Despite affordability declining YOY, real house-buying power is actually near a record high.

Home prices remain 29% below their peak in April 2006 when adjusted for higher income levels and historically low mortgage rates. All 50 markets analyzed by First American are more affordable than at the peak of the last housing boom.

“According to our house-buying power-adjusted RHPI, homes are 34 percent more affordable on average across all 50 markets than their respective RHPI peaks,” Mark Fleming, chief economist at First American, said in a press release.

“While the supply-demand imbalance in today’s housing market continues to fuel strong house price appreciation across the country, the dramatic increase in house-buying power relative to 2006 driven by lower mortgage rates and higher incomes has more than made up for it. In fact, in four cities homes are more than 50% more affordable today than at their prior RHPI peak.”

Affordability has improved the most since the prior peak in Washington, D.C. (53% more affordable from the peak), Baltimore (53%), Chicago (52%), Miami (50%), and Riverside, California (48%).

Even the cities that have improved the least are somewhat more affordable than in April 2006. Those cities are Nashville, TN (0.3%), Buffalo, NY (3%), Denver (9%), Kansas City, MO (12%), and Salt Lake City (15%).

“House prices are widely expected to continue to increase, although at a slower pace, and mortgage rates are likely to rise, so it’s likely that affordability will decline further, but in most markets we’re still a long way from the mid-2000s boom,” Fleming said.

“In the near term, affordability is likely to wane further nationally as rising mortgage rates and increasing house prices continue to outpace gains in household income. However, it’s helpful to put affordability in historical context.”