Homebuying power is on the verge of a 20-year-high

by Steve Randall30 Jul 2019

The Fed’s FOMC will make its decision this week and there could be lower interest rates ahead.

And according to First American, likely lower mortgage rates and rising incomes could mean homebuying power reaching its highest level in almost 20 years.

“The first Fed rate cut since December 2008 will trigger industry and media speculation about mortgage rates declining further,” said Mark Fleming, chief economist at First American. “While changes to the federal funds rate don't directly influence mortgage rates, a rate cut will indicate concern about possible economic weakness and that may increase demand for long-term Treasury bonds, which mortgage rates follow closely.”

He added that if the mortgage rate declines from its current July 2019 level of 3.8% to the expected level of 3.7% in the third quarter of 2019, assuming a 5% down payment, and the July 2019 average household income of $65,800, house-buying power increases a modest 0.1%, from $410,000 to $414,000.

“In this hypothetical 3.7 percent mortgage rate environment, consumer-house buying power would be 13.3% higher than it was in July 2018, when the 30-year, fixed mortgage rate was 4.5%. In fact, it would be the highest house-buying power in the history of the series, which dates to the year 2000,” said Fleming.

Real House Price Index

First American’s Real House Price Index for May showed a decline of 0.7% month-over-month and declined 3.7% year-over-year.

The RHPI measures the price changes of single-family properties throughout the US, adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels.

Based on changes in income and interest rates, homebuying power increased 1.3% between April and May and increased 9.3% year-over-year.

“Our estimate of average household income, based on Census and Bureau of Labor Statistics data, is at the highest level since 2000. Average nominal household incomes are nearly 57% higher today than in January 2000,” said Fleming. “Record income levels combined with mortgage rates near historic lows mean consumer house-buying power is more than 150% greater today than it was in January 2000. While rates are expected to remain low, the fate of the labor market will determine the direction of the other half of the house-buying power equation and, ultimately, affordability.”


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