First American reports significant boost for home-buying power

As 2018 ended, there was good news for housing affordability according to First American Financial.

The firm calculates that consumer house-buying power, which includes the impact of income and interest rate changes on single-family house prices, increased from the previous month as mortgage rates, which had been trending higher in 2018, declined.

“Mortgage rates in December fell 0.23 percentage points compared with the previous month and household income increased 0.4%,” said Mark Fleming, chief economist at First American. “The effect? A 3.1% increase in house-buying power, the largest monthly gain in more than five years.”

Based on the increased home-buying power, First American’s Real House Price Index shows a 2.4% decrease in prices in December and an 11.8% increase year-over-year.

Affordability boost

Housing affordability benefited from rising wages as well as the lower mortgage rates. Annual hourly wage growth increased by 3.5% year-over-year and the labor market’s record streak of job gains continued.

“In 2018, the increase in household income helped mitigate the impact of rising mortgage rates and the fast pace of unadjusted house price growth on affordability,” said Fleming. “Rising mortgage rates, which increased from 4.0-4.6% in 2018, reduced consumer house-buying power by nearly $31,000. The growth in household income, however, increased consumer house-buying power by $11,000. The overall net effect in 2018 of the affordability tug-of-war between increasing mortgage rates and income growth was a $19,000 decline in house-buying power, compared with December 2017.”

December shifted in favor of buyers and increased home-buying power by $10,000 on average.

“That means a home buyer with a 5% down payment and a mortgage rate of 4.6% saw their house-buying power increase from $354,500 to $364,500,” added Fleming. “The monthly increase in household income further increased house-buying power to $365,600. Overall, house-buying power increased by $11,100 in December compared with the previous month, the second largest monthly increase in house-buying power since the beginning of the millennium.”