U.S. Housing Affordability Helped And Hurt By Wage Growth: First American Real House Price Index

There has been an increase in real house prices in the U.S. by 0.4 per cent for the period of November and December 2017 according to the First American Real House Price Index (RHPI).

This index reflects the price changes throughout the U.S. of single-family properties while taking into consideration the impact for change sin rates of interest and income on purchasing power of consumers over time. This therefore is an indication of the affordability of housing in the country.

There was also an increase of 0.1 per cent in the purchasing power of consumers for a house in the same period compared to the two previous months while it was 5.6 per cent higher year-on-year.

Compared to the peak in the housing prices in 2006, the real house prices were 37.1 per cent lower and 15.5 per cent lower than the prices in January 2000.

“Earlier this month, the Bureau of Labor Statistics reported that average hourly earnings increased in January by 2.9 percent compared with a year ago. This was a big splash of economic news that had ripple effects on the housing market, as the 2.9 percent increase in wages surpassed expectations,” said Mark Fleming, chief economist at First American. “Rising wages mean home buyers can borrow more. In other words, consumer house-buying power – how much one can buy based on changes in income and interest rates – is growing, which is a boon to the housing market.

“However, the larger than expected increase in wage growth set off a chain reaction. It increased concerns among investors that inflation will rise and the Federal Reserve will increase rates at a faster pace than previously expected. Consequently, the 30-year, fixed-rate mortgage rate increased to 4.4 percent last week,” said Fleming. “The consensus among economists is that 30-year, fixed-rate mortgage rates will approach 5 percent by the end of the year. Rising interest rates increase borrowing costs for home buyers, thereby decreasing consumer house-buying power.”

Therefore, with the rise in cost of borrowing, the affordability of housing is reduced with rising mortgage rates. But because there is a rise in wages more than expected, rates are increasing, Fleming said. Wage growth therefore has hurt affordability, he added.

“However, rising household income has largely offset the increase in borrowing costs brought about by higher interest rates in the past year. In December, consumer house-buying power was up 5.6 percent compared with a year before, even though mortgage rates increased in 2017”, he said.

According to Fleming, a perspective of housing affordability can be got by a comparison of house-buying power and price of houses by market. this is important because there is significant variations in household income in various housing markets.

“It’s important to remember that rising mortgage rates are often the result of positive economic conditions, like rising incomes and strong economic performance. In 2018, home buyers may have to take the good, wage growth, with the bad, rising mortgage rates,” said Fleming.

(Adapted from Businesswire.com)


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