Wage Growth Reduces Sting of Rising Rates on Affordability, According to First American Real House Price Index

Rising household income contributed $11,000 to consumer house-buying power, which helped mitigate the negative effects of rising mortgage rates, says Chief Economist Mark Fleming


October 29, 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 August 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. 

August 2018 Real House Price Index

  • Real house prices increased 0.6 percent between July 2018 and August 2018.

  • Real house prices increased 11.3 percent year over year.

  • Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.2 percent between July 2018 and August 2018, and declined 4.7 percent year over year.

  • Average household income has increased 3.2 percent since August 2017 and 53 percent since January 2000.

  • Real house prices are 38.6 percent below their housing boom peak in August 2006 and 13.0 percent below the level of prices in January 2000. 

Chief Economist Analysis: Wage Growth Soothes Sting of Rising Rates on Consumer House-Buying Power

“Understanding the dynamics that influence consumer house-buying power, how much home one can buy based on changes in income and interest rates, provides helpful perspective on the housing market,” said Mark Fleming, chief economist at First American. “When incomes rise, consumer house-buying power increases. When mortgage rates or nominal house prices rise, consumer house-buying power declines.

“Our Real House Price Index (RHPI) uses consumer house-buying power to adjust nominal house prices, offering insight into affordability. For example, according to our RHPI, real house prices increased 11.3 percent year over year in August, marking a significant, but unsurprising decline in affordability,” said Fleming. “Since August 2017, two of the key factors in affordability have risen – mortgage rates increased 67-basis points and unadjusted house prices rose by 6 percent. However, household income growth helps affordability, and household incomes increased by 3.2 percent in August.” 

Wage Growth Contributed $11,000 to Consumer House-Buying Power

“Let’s examine how the increase in household income helped mitigate the influences of rising mortgage rates and unadjusted house prices on affordability,” said Fleming. “Rising mortgage rates, which increased from 3.9 to 4.6 percent over the last year, reduced consumer house-buying power by nearly $30,000.

 “That means a home buyer with a 5 percent down payment and a mortgage rate of 4.6 percent saw their house-buying power decrease from $394,000 to $364,000, since last August because of the increase in mortgage rates. But, that $30,000 decline does not factor in the change in household income since last August,” said Fleming.

“Mortgage rates are rising because the economy is growing, the labor market is tightening, and wage growth is increasing. Wage growth translates into rising household incomes, which were 3.2 percent higher in August compared to a year ago. That growth in household income contributed $11,000 to consumer house-buying power, which helped mitigate the negative effects of rising mortgage rates,” said Fleming. “While rising mortgage rates reduced house-buying power by $30,000 over the last year, rising incomes increased consumer house-buying power by $11,000. The net effect? Overall consumer house-buying power fell by $19,000 in August compared with a year ago.” 

Historical Perspective: House-Buying Power Still Strong

“While the negative effect of rising mortgage rates is outpacing the benefit of rising incomes, consumer house-buying power continues to be strong because mortgage rates remain near historic lows. Between the peak of unadjusted house prices in 2006 and August 2018, the average 30-year, fixed-rate mortgage fell from 6.8 percent to 4.6 percent,” said Fleming. “Over the same 12-year period, household income has increased 30 percent. Lower mortgage rates and higher income levels mean house-buying power is nearly 66 percent higher today than it was in 2006.

“While the future of consumer house-buying power continues to rely on the tug-of-war between household income and mortgage rates, historically, home buyers still have more house-buying power today than they did over a decade ago,” said Fleming. 

August 2018 Real House Price State Highlights

  • The five states with the greatest year-over-year increase in the RHPI are: Nevada (+22.3 percent), New Jersey (+20.0 percent), Michigan (+19.8 percent), Ohio (+19.7 percent), and Alaska (+18.1 percent).

  • No state had a year-over-year decrease in the RHPI in August. 

    August 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 (+25.8 percent), Las Vegas (+25.2 percent), Detroit (+20.9 percent), Cincinnati (+20.9 percent), and Atlanta (+20.5 percent).

    No CBSA had a year-over-year decrease in the RHPI in August. 

    Next Release

    The next release of the First American Real House Price Index will take place the week of November 26, 2018 for August 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; 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.

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