First American: Seller’s market likely to persist in 2020

The nationwide housing shortage is likely to prolong the seller’s market despite favorable conditions for homebuyers, according to a new report from First American Financial Corp.

In the latest iteration of its Real House Price Index (RHPI), First American revealed that consumer homebuying power — how much a potential a homebuyer can afford based on changes in income and interest rates — increased 14% year over year this past December. First American’s “real” house prices adjust for homebuying power, so that gain led to a 5.8% decline in real house prices between December 2018 and December 2019.

“As 2019 came to a close, potential homebuyers received a year-end gift as affordability improved relative to one year ago,” said Mark Fleming, First American chief economist. “Two of the three key drivers of the Real House Price Index, household income and mortgage rates, swung in favor of increased affordability in December.”

Real house prices are now 17.3% less expensive than in January 2000, according to First American. Although nominal, unadjusted home prices are now 9.3% above their housing-boom peak in 2006, real house prices are 41.1% below that same zenith.

Even with the affordability boost, however, Fleming said that low inventory continues to keep the market pendulum from fully swinging toward buyers.

“House-buying power exceeds median house price in most of the markets we monitor in our RHPI,” Fleming said. “However, while low mortgage rates and higher income boost affordability and demand for homes, it’s hard to buy what’s not for sale.

“That means seller’s market conditions are likely to persist in 2020, as short supply and strong demand will drive faster price appreciation and reduce the current levels of affordability in many markets.”

Prices aren’t out of reach in most metro areas — at least for now. Median home prices exceed homebuying power in only four markets, all pricey coastal cities in California. These cities also are the four metros with the highest nominal home prices among the 44 tracked by First American: San Jose, San Francisco, Los Angeles and San Diego. And even in those areas, real house prices are dropping: San Jose (down 11.2%) and San Francisco (down 9.3%) were among the four markets with the largest year-over-year decreases in the RHPI this past December.

Meanwhile, in other cities with expensive home prices, such as Seattle, Boston, Denver and Washington, D.C., affordability is aided by large median household incomes, despite high nominal sales prices.

According to a report earlier this month, however, the inventory of homes for sale has plummeted to its lowest level since 2012. The market has already felt choked thanks to low supply, as December’s 4.9% monthly decline in pending home sales was the biggest since 2010. And with so few homes on the market, prices remain on the rise, They began heating up this past November after slowing for much of 2019, CoreLogic reported in January.

According to Fleming, the question is whether the growth of homebuying power can keep up.


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