Wage Growth Helps and Hurts Housing Affordability, According to First American Real House Price Index

Rising mortgage rates reduce the affordability of housing but, on the other hand, rates are increasing because wages are rising faster than expected, says Chief Economist Mark Fleming


February 26, 2018, Santa Ana, Calif.

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the December 2017 First American Real House Price Index (RHPI). The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

December 2017 Real House Price Index

  • Real house prices increased 0.4 percent between November and December 2017.
  • Real house prices increased 0.4 percent year over year.
  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.1 percent between November and December 2017, and grew 5.6 percent year over year.
  • Real house prices are 37.1 percent below their housing boom peak in July 2006 and 15.5 percent below the level of prices in January 2000.
  • Unadjusted house prices increased by 6.0 percent in December on a year-over-year basis and are 6.9 percent above the housing boom peak in 2007.

Chief Economist Analysis: Hurray, Wages are Rising. Oh No, Wages are Rising.

“Earlier this month, the Bureau of Labor Statistics reported that average hourly earnings increased in January by 2.9 percent compared with a year ago. This was a big splash of economic news that had ripple effects on the housing market, as the 2.9 percent increase in wages surpassed expectations,” said Mark Fleming, chief economist at First American. “Rising wages mean home buyers can borrow more. In other words, consumer house-buying power – how much one can buy based on changes in income and interest rates – is growing, which is a boon to the housing market.

“However, the larger than expected increase in wage growth set off a chain reaction. It increased concerns among investors that inflation will rise and the Federal Reserve will increase rates at a faster pace than previously expected. Consequently, the 30-year, fixed-rate mortgage rate increased to 4.4 percent last week,” said Fleming. “The consensus among economists is that 30-year, fixed-rate mortgage rates will approach 5 percent by the end of the year. Rising interest rates increase borrowing costs for home buyers, thereby decreasing consumer house-buying power.

“So, on the one hand, rising mortgage rates reduce the affordability of housing, as the cost of borrowing increases. But, on the other hand, rates are increasing because wages are rising faster than expected. Wage growth simultaneously helped and hurt housing affordability,” said Fleming. “However, rising household income has largely offset the increase in borrowing costs brought about by higher interest rates in the past year. In December, consumer house-buying power was up 5.6 percent compared with a year before, even though mortgage rates increased in 2017.”

Consumer House-Buying Power Exceeds House Prices in Most Markets

“Household income varies substantially by housing market, so comparing house-buying power with house prices by market can provide perspective on housing affordability,” said Fleming. “In the accompanying chart, home buyers in markets below the line have house-buying power that is greater than the average house price in their market – houses are relatively more affordable in these markets. Home buyers in markets above the line have house-buying power that is less than the average house price in their market – houses are relatively less affordable in these markets.

“It’s no surprise that house prices exceed house-buying power in markets like San Francisco, New York and Los Angeles. Yet, housing markets generally considered expensive, like Washington, D.C., Boston and Denver, are actually more affordable than many believe,” said Fleming. “The fact is most of the markets we monitor in our Real House Price Index (RHPI) have more than enough house-buying power when compared to the average house prices in the market.

“It’s important to remember that rising mortgage rates are often the result of positive economic conditions, like rising incomes and strong economic performance. In 2018, home buyers may have to take the good, wage growth, with the bad, rising mortgage rates,” said Fleming.

December 2017 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: Delaware (+7.3 percent), Nevada (+7.0 percent), New York (+6.6 percent), New Hampshire (+5.8 percent) and Michigan (+4.2 percent).
  • The five states with the greatest year-over-year decrease in the RHPI are: Arkansas (-5.3 percent), Maryland (-5.1 percent), Washington, D.C. (-3.7 percent), New Jersey (-3.2 percent) and Wyoming (-2.9 percent).   

    December 2017 Real House Price Local Market Highlights

  • Among the Core Based Statistical Areas (CBSAs) tracked by First American, the five markets with the greatest year-over-year increase in the RHPI are: San Jose, Calif. (+9.8 percent), Las Vegas (+9.1 percent), Columbus, Ohio (+8.8 percent), Seattle (+5.8 percent) and Philadelphia (+5.7 percent).
  • Among the CBSAs tracked by First American, the five markets with the greatest year-over-year decrease in the RHPI are: Pittsburgh (-7.3 percent), Riverside, Calif. (-3.3 percent), Dallas (-2.9 percent), Memphis, Tenn. (-1.6 percent) and Cincinnati (-1.5 percent).

    Next Release

    The next release of the First American Real House Price Index will take place the week of March 26, 2018 for January 2018 data.

    Methodology

    The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.

    Disclaimer

    Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2018 by First American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and wealth management services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com.

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