'Downside stickiness' boosts home prices even as purchase power rises

Purchasing power grew 15.8% annually in July and 2.2% monthly behind salary gains and falling interest rates, according to First American's Real House Price Index. In comparison, purchasing power rose 13.7% year-over-year and 1.1% month-over-month in June.

The Real House Price Index — a metric that adjusts residential property prices for income and mortgage rate fluctuations — dropped 6.6% annually and 0.8% from June. Declines in RHPI equate to improved affordability for buyers. Despite the pandemic, median household income increased 5.5% from the year prior and was the main driver for the increased affordability.

"With the exception of the Great Recession in 2008-2009 and a modest decline in the 1990 recession, nominal house prices have remained flat or risen slowly, but have not declined," said Mark Fleming, chief economist at First American.

"This demonstrates the ‘downside stickiness’ of house prices during economic decline. In the pandemic-driven recession of 2020, we’ve seen house price appreciation grow faster than in any of the economic declines in our recent past. This phenomenon of continued house price appreciation amid economic decline is unique to the housing market because sellers tend to withdraw supply to wait out the economic storm, rather than sell at lower prices."

At the state level, only Wyoming posted annual RHPI growth in July, rising 1.53%. Declines of 0.61% in Oklahoma and 0.86% in Ohio followed. RHPI fell furthest in Massachusetts, down 11.37% from July 2019. New Hampshire and Nevada trailed with drops of 10.97% and 10.54%, respectively.

By housing market, RHPI rose in only seven of the 50 largest metro areas tracked. Pittsburgh's gain of 4.21% led the way, followed by 2.19% in Cleveland and 1.65% in Seattle. Boston had the largest decrease at 13.83%, while San Francisco trailed closely at a drop of 13.5% with a decline of 12.16% in San Jose, Calif., next.

"Nominal house price appreciation is showing no signs of slowing down, as supply and demand imbalances persist," Fleming said in the report. "While mortgage rates have, thus far, won the affordability tug-of-war nationally, some housing markets are beginning to feel the impact of pandemic-driven job losses on household income levels. Affordability is resilient in the face of economic downturns, but just how resilient depends on the dynamics of mortgage rates, income, and house price appreciation."