Vermont sees third highest increase in real home values in the U.S.

Record equity levels unlikely to spur many homeowners to sell

Vermont has the third highest increase in real home value in the nation according to the First American Real House Price Index (RHPI), which 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. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

First American Financial Corporation (NYSE: FAF), released the February 2021 data Tuesday, April 27. Arizona and Wyoming were ahead of Vermont’s 6.2% increase, while Iowa, Massachusetts and Illinois had the biggest declines.

“The three components of the RHPI are household income, mortgage rates and a nominal house price index. The RHPI adjusts nominal house prices according to changes in income and interest rates, which together make up consumer house-buying power. When incomes rise, house-buying power rises as well,” said Mark Fleming, chief economist at First American. “However, when mortgage rates rise, house-buying power declines. Similarly, house-buying power declines when unadjusted nominal house prices rise.

“In February 2020, nominal house prices soared and mortgage rates increased, offsetting any affordability benefit from an increase in income levels. As a result, the RHPI increased 1.6% over January, meaning affordability declined,” said Fleming. “Yet, compared with one year ago, affordability improved 1.3%, according to the RHPI. Nationally, affordability is likely to wane further in March due to the modest rise in mortgage rates and faster house price appreciation outpacing gains in household income.”

The housing wealth effect: fact or fiction?

“The rapid pace of annual nominal house price appreciation, just over 14% in February, begs the question: isn’t rapid house price growth good news for existing homeowners looking to move? According to a behavioral economic theory dubbed ‘the wealth effect,’ homeowners are more likely to move if they feel ‘wealthier’ because the value of their home rises,” said Fleming. Yet, that homeowner would be entering the housing market at a time when all the other homes in the area have likely appreciated by the same amount. While the homeowner’s equity gains boost wealth, the equity gains allow the homeowner to keep pace with the housing market, rather than outpace it. 

So, if feeling wealthier doesn’t actually help buy more home, what can incentivize a homeowner to sell? Falling mortgage rates.

“When rates fall, a potential home buyer can buy the same amount of home for a lower monthly payment or buy more home for the same monthly payment. The 30-year tailwind of declining mortgage rates has allowed homeowners to buy a home at one mortgage rate and then later sell and move into a more expensive home when rates are lower,” said Fleming. “This long-run decline in mortgage rates has encouraged existing homeowners to move out and move up.”

“In 2021, the housing market has seen faster house price appreciation, modestly rising mortgage rates and record low levels of homes for sale. While existing homeowners are sitting on historically high levels of equity and feeling wealthier, many of these owners have also secured historically low fixed-rate mortgages,” said Fleming. “There is a financial ‘lock-in’ effect that increases as mortgage rates rise and as the size of a mortgage increases. Instead of a tailwind, rising mortgage rates increase the monthly cost of borrowing the same amount that a homeowner owes on their existing mortgage. Why move out if you have to move ‘down’ or pay more to move up?

“The higher the prevailing market mortgage rate is relative to the homeowner’s existing mortgage rate, the stronger the lock-in effect. Additionally, the record low level of houses for sale makes it difficult to find the next house to buy, so sellers – who are also prospective buyers – don’t sell for fear of not finding something to buy,” said Fleming. “In short, existing homeowners are increasingly locked into their current homes as rates rise.

“Wealthier homeowners may feel locked into their existing homes, but first-time home buyers have no such financial lock. As of December 2020, nearly 50% of all purchase mortgages originated by Fannie and Freddie went to first-time home buyers. Additionally, buying a home is often prompted by lifestyle decisions more so than financial considerations,” said Fleming. “Despite a likely increase in the lock-in effect if rates continue to rise, we expect home sales will continue to remain robust, but it won’t necessarily be fueled by existing homeowners moving out and moving up as a result of the wealth effect.”

February 2021 real house price state highlights

The five states with the greatest year-over-year increase in the RHPI are: Arizona (+8.4%), Wyoming (+8.4%), Vermont (+6.2%), Washington (+5.4%), and Mississippi (+5.3%).

The five states with the greatest year-over-year decrease in the RHPI are: Iowa (-4.4%), Massachusetts (-3.5%), Illinois (-3.5%), New York (-3.4%), and California (-3.3%).

February 2021 real house price local market highlights

Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: Kansas City, Mo. (+12.1%), Phoenix (+9.7%), Memphis, Tenn. (+9.0%), Hartford, Conn. (+8.9%), and Tampa, Fla. (+8.0%).

Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year decrease in the RHPI are: San Francisco (-10.0%), San Jose, Calif. (-7.8%), Miami (-5.8%), Boston (-5.7%), and Providence, R.I. (-4.1%).

The next release of the First American Real House Price Index will take place the week of May 24, 2021 for March 2021 data.

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