First American says consumers have almost double power of Jan 2000
Rising mortgage rates are likely and will probably hit 5% in 2019 but consumers are well-placed to buy homes.
A report from First American Financial Corporation says that despite rate rises consumers have strong buying power thanks to the increase in wage growth.
“Average household incomes are 53% 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,” says chief economist Mark Fleming.
Wages have growth 2.9% since July 2017 while real house prices are 37.9% below their housing boom peak in July 2006 and 12.0% below the level of prices in January 2000.
First American’s Real House Price Index measures the price changes of single-family properties throughout the US adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national, state and metropolitan area levels.
In the month from June to July 2018 the index showed prices were flat while year-over-year it was up 12.2%.
Consumer house-buying power, how much one can buy based on changes in income and interest rates, increased 0.9% month-over-month and declined 3.7% year-over-year.
“If the mortgage rate increased from its current level of 4.5% to the expected level of 5% - assuming a 5% down payment and the July 2018 average household income of $64,000 - we find that house-buying power falls a modest 5.5%, from $366,000 to $346,000,” said Fleming. “In this hypothetical 5% mortgage rate environment, consumer-house buying power would be 11% lower than it was in July 2017, when the 30-year, fixed mortgage rate was 3.97%.”
