First American Financial announced that consumer homebuying power declined from a year ago as affordability in a rising interest rate environment continues to be a concern.
The First American Real House Price Index (RHPI) for July found that real house prices remained flat from a month ago but rose 12.2 percent from July 2017. Consumer homebuying power – how much one can buy based on changes in income and interest rates – declined 3.7 percent from a year earlier.
“It’s evident that rising mortgage rates have an impact on affordability,” First American Chief Economist Mark Fleming said in a press release. “However, the root cause of higher inflation and, in turn, rising mortgage rates is surging wage growth. In fact, our estimate of average household income, based on Census and Bureau of Labor Statistics data, reached the highest level since 2000.”
As the Federal Reserve continues to signal its willingness to raise the federal funds rate, Fleming said economists generally agree that mortgage rates will average 5 percent in 2019 for 30-year, fixed-rate loans.
“Home sales will continue to grow despite rising rates, due to the strength of economy. But, what will 5 percent mortgage rates mean for affordability?” he asked. “If the mortgage rate increased from its current level of 4.5 percent to the expected level of 5 percent, assuming a 5 percent downpayment, and the July 2018 average household income of $64,000, we find that house-buying power falls a modest 5.5 percent, from $366,000 to $346,000.”
In that scenario, Fleming said homebuying power would be 11 percent lower than a year ago.
Historically, however, Fleming was quick to point out the strength in the economy and the market today.
The RPHI found that average household income has increased 53 percent since January 2000, while real house prices are 37.9 percent below their housing boom peak in July 2006 and 12 percent below the level of prices in January 2000.
“As a result, consumer house-buying power is still 2.2 times higher today than in January 2000,” he said. “Changes in affordability depend on the tug-of-war between rising household income and inflation-driven pressure on mortgage rates.”