Their index is based on three components:
The report explains:
“Changing incomes and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases.”Combining these three crucial pieces of the home purchasing process, First Americancreated an index delineating the actual home-buying power that consumers have had dating back to 1991.
Here is a graph comparing First American’s consumer house-buying power (blue area) to the actual median home price that year from the National Association of Realtors(yellow line).
Consumer house-buyer power has been greater than the actual price of a home since 1991. And, the spread is larger over the last decade.
Bottom LineEven though home prices are increasing rapidly and are now close to the values last seen a decade ago, the actual affordability of a home is much better now. As Chief Economist Mark Fleming explains in the report:
“Though unadjusted house prices have risen to record highs, consumer house-buying power stands at near-historic levels, as well, signaling that real house prices are not even close to their historical peak.”