Outlook for Affordability in 2019 Amid Rising Rates, According to First American Real House Price Index
Changes in affordability depend on the tug-of-war between rising household income and inflation-driven pressure on mortgage rates, says Chief Economist Mark Fleming
September 24, 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 July 2018 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.
July 2018 Real House Price Index
Real house prices remained flat between June 2018 and July 2018.
Real house prices increased 12.2 percent year over year.
Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.9 percent between June 2018 and July 2018, and declined 3.7 percent year over year.
Average household income has increased 2.9 percent since July 2017 and 53 percent since January 2000.
Real house prices are 37.9 percent below their housing boom peak in July 2006 and 12.0 percent below the level of prices in January 2000.
Chief Economist Analysis: How Will Affordability in 2019 Fare Amid Rising Rates?
“The Federal Open Market Committee (FOMC) meeting is just around the corner and a rate hike is almost certain, according to experts, which will trigger conversations about rising mortgage rates across the housing industry. While changes to the federal funds rate won’t necessarily spur further increases in mortgage rates, mortgage rates are expected to rise nonetheless,” said Mark Fleming, chief economist at First American.
“Mortgages rates typically follow the same path as long-term bond yields, which are expected to increase due to inflation driven by healthy economic growth. This inflation-driven increase in long-term bond yields will, in turn, increase mortgage rates,” said Fleming. “Due in large part to the strong economy, the 30-year, fixed mortgage rate has increased 56-basis points over the past 12 months.”
Five Percent Mortgage Rates Likely in 2019
“Consensus among economists is that the 30-year, fixed mortgage rate will increase from its current rate of 4.53 percent to an average of 5 percent in 2019,” said Fleming. “Last week, we analyzed what a rate of 5.0 percent could mean for existing-home sales. The result? Home sales will continue to grow despite rising rates, due to the strength of economy. But, what will 5 percent mortgage rates mean for affordability?
“The First American Real House Price Index (RHPI) measures consumer house-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage,” said Fleming. “Shifts in income and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases.
“If the mortgage rate increased from its current level of 4.5 percent to the expected level of 5 percent, assuming a 5 percent down payment, and the July 2018 average household income of $64,000, we find that house-buying power falls a modest 5.5 percent, from $366,000 to $346,000,” said Fleming. “In this hypothetical 5 percent mortgage rate environment, consumer-house buying power would be 11 percent lower than it was in July 2017, when the 30-year, fixed mortgage rate was 3.97 percent.”
Consumer House-Buying Power Remains 2.2 Times Greater than January 2000
“It’s evident that rising mortgage rates have an impact on affordability. However, the root cause of higher inflation and, in turn, rising mortgage rates is surging wage growth. In fact, our estimate of average household income, based on Census and Bureau of Labor Statistics data, reached the highest level since 2000,” said Fleming.
“Average household incomes are 53 percent 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,” said Fleming. “Changes in affordability depend on the tug-of-war between rising household income and inflation-driven pressure on mortgage rates.”
July 2018 Real House Price State Highlights
The five states with the greatest year-over-year increase in the RHPI are: Nevada (+18.7 percent), Ohio (+17.9 percent), New York (+16.8 percent), New Jersey (+15.6 percent), and Michigan (+15.4 percent).
No state had a year-over-year decrease in the RHPI in June.
July 2018 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: Cleveland (+24.4 percent), Las Vegas (+21.8 percent), San Jose, Calif. (+21.8 percent), Jacksonville, Fla. (+17.7 percent), and Cincinnati (+17.7 percent).
No CBSA had a year-over-year decrease in the RHPI in June.
The next release of the First American Real House Price Index will take place the week of October 29, 2018 for August 2018 data.
The methodology statement for the First American Real House Price Index is available at http://www.firstam.com/economics/real-house-price-index.
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; banking, trust and wealth management services; and other related products and 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.