Rising rates likely but home buying power remains strong

First American says consumers have almost double power of Jan 2000

Rising rates likely but home buying power remains strong

Rising mortgage rates are likely and will probably hit 5% in 2019 but consumers are well-placed to buy homes.

A report from First American Financial Corporation says that despite rate rises consumers have strong buying power thanks to the increase in wage growth.

“Average household incomes are 53% higher today than in January 2000. On the other hand, the 30-year, fixed mortgage rate remains near its historic low point. As a result, consumer house-buying power is still 2.2 times higher today than in January 2000,” says chief economist Mark Fleming.

Wages have growth 2.9% since July 2017 while real house prices are 37.9% below their housing boom peak in July 2006 and 12.0% below the level of prices in January 2000.

First American’s Real House Price Index 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.

In the month from June to July 2018 the index showed prices were flat while year-over-year it was up 12.2%.

Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.9% month-over-month and declined 3.7% year-over-year.

“If the mortgage rate increased from its current level of 4.5% to the expected level of 5% - assuming a 5% down payment and the July 2018 average household income of $64,000 - we find that house-buying power falls a modest 5.5%, from $366,000 to $346,000,” said Fleming. “In this hypothetical 5% mortgage rate environment, consumer-house buying power would be 11% lower than it was in July 2017, when the 30-year, fixed mortgage rate was 3.97%.”