Faster-than-expected wage growth helps, hurts housing affordability

A First American index found real house prices increased in December

By Francis Monfort

28 Feb 2018

Housing affordability declined in December as mortgage rates increased, according to the Real House Price Index (RHPI) released by First American Financial for December.

Real house prices climbed 0.4% on both month-over-month and year-over-year bases. Consumer house-buying power, how much one can buy based on changes in income and interest rates, rose 0.1% month over month and increased 5.6% compared to December 2016. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

First American Chief Economist Mark Fleming said that although affordability declined as a result of rising rates, the rates are increased because of faster-than-expected wage growth.

“Rising wages mean home buyers can borrow more,” Fleming said. “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, Fleming said that larger-than-expected growth set off concerns among investors that inflation will increase and the Federal Reserve will hike rates faster than expected. Borrowing costs increase when interest rates rise, in effect reducing 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,” Fleming said. “However, rising household income has largely offset the increase in borrowing costs brought about by higher interest rates in the past year.”

According to the index, real house prices in December are 37.1% below the housing boom peak level in July and 2006 and 15.5% below prices in January 2000. On an unadjusted basis, prices rose 6% year over year and are 6.9% above the housing boom peak in 2007.