Index shows income growth needs to catch up with rates
Greater growth in income is required to offset the affordability constraints of rising house prices and rates.
That’s one of the takeaways from the latest Real House Price Index from First American which accounts for the impact of mortgage rates and income on the price of single-family homes across the United States.
The index for September shows that household income, mortgage rates, and unadjusted house prices all gained but the figures did not tip the balance in favor of affordability.
“When household income rises, consumer house-buying power increases. When mortgage rates and house prices increase, consumer house-buying power decreases. The 30-year, fixed-rate mortgage and the unadjusted house price index increased by 0.8% and 7.5% respectively,” said First American chief economist Mark Fleming. “Even though household income increased 2.9% since September 2017 and boosted consumer house-buying power, the Real House Price Index increased 15.3% compared to last September, the highest yearly growth rate since 2014.”
In the year to September 2018, income growth meant an extra $10K of homebuying power; but the increase in rates and prices reduced homebuying power by $36K – making a net reduction of $26K.
“At the moment, rising mortgage rates are winning the buying power tug-of-war with rising household incomes – the pace of household income growth is not sufficient to fully offset the change in mortgage rates,” adde Fleming.
Where affordability is declining most
The five markets with the highest year-over-year growth in the RHPI are:
- Cleveland, OH (+28.2%)
- Las Vegas, NV (+26.6%)
- Cincinnati, OH (+23.8%)
- Atlanta, GA (+23.4%)
- Orlando, FL (+22.6%)
“At first glance, these markets don’t seem to have much in common. Upon closer inspection, however, all five markets had household income growth below the national average of 2.9%,” said Fleming. “Orlando uniquely experienced a decline in household income of 0.4% compared with a year ago. The importance of household income growth’s ability to mitigate the loss of affordability from a rising mortgage rate is clear. Without stronger household income growth, rising mortgage rates will continue to impede consumer house-buying power, reducing affordability.”
