First American: Home prices point to trouble ahead

Data reveals Americans need income growth

Home prices have climbed 15.3% year over year, signaling affordability concerns lie ahead, according to First American’s Real House Price Index.

Notably, the average household income has increased 2.9% since September 2017 and 53% since January 2000.

First American Chief Economist Mark Fleming said the importance of household income growth’s ability to mitigate the loss of affordability from a rising mortgage rate is clear.

“Without stronger household income growth, rising mortgage rates will continue to impede consumer house-buying power, reducing affordability,” Fleming said.

According to First American’s data, from August 2018 to September 2018 real house prices rose 2%. However, consumer buying power fell 0.9% between this time period, and declined 6.7% year over year.

When consumer house-buying power is a factored in, home prices are actually 37% below their 2006 peak and 11% below prices in January 2000.

“The jump in mortgage rates reduced house-buying power by $36,000 since September 2017,” Fleming continued. “Over the same period, household income growth increased consumer house-buying power by $10,000.”

“The net effect? Overall consumer house-buying power fell by $26,000 in September compared with a year ago,” Fleming said. “At the moment, rising mortgage rates are winning the buying power tug-of-war with rising household incomes – the pace of household income growth is not sufficient to fully offset the change in mortgage rates.”

In September, the five markets with the highest year-over-year growth in the RHPI were Cleveland (28.2%), Las Vegas (26.6%), Cincinnati (23.8%), Atlanta (23.4%) and Orlando (22.6%).

“At first glance, these markets don’t seem to have much in common. Upon closer inspection, however, all five markets had household income growth below the national average of 2.9%,” Fleming said. “Orlando uniquely experienced a decline in household income of 0.4% compared with a year ago.”

Fleming said as the age-old adage goes, housing is all about location, location, location. Affordability is no different.

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