First American: Home buying power sees largest monthly gain in more than five years

Home prices increased 2.4% in December

In December 2018, home prices increased 2.4%, rising 11.8% year over year, according to First American’s Real House Price Index.

According to First American’s data, unadjusted house prices sit 2% above the housing boom peak. Interestingly, consumer buying power rose 3.1% between November and December, declining 5% year over year.

When consumer house-buying power is factored in, home prices are actually 37.2% below their 2006 peak and 12% below prices from January 2000.

First American Chief Economist Mark Fleming said while housing affordability in 2018 fared poorly in comparison to 2017, the year finished strong in December thanks to declining mortgage rates.

"Mortgage rates in December fell 0.23 percentage points compared with the previous month and household income increased 0.4%," Fleming continued. "The effect? A 3.1% increase in house-buying power, the largest monthly gain in more than five years. As a result, real house prices experienced the largest monthly decline since 2016.”

According to Fleming, rising wage growth and lower mortgage rates are driving affordability. 

“In December, the labor market remained impressive. Annual hourly wage growth increased by 3.5% compared with a year earlier, and the labor market’s record streak of job gains continued. The labor market has increased average household income by 55% since January 2000,” Fleming continued. “In 2018, the increase in household income helped mitigate the impact of rising mortgage rates and the fast pace of unadjusted house price growth on affordability. Rising mortgage rates, which increased from 4.0 to 4.6% in 2018, reduced consumer house-buying power by nearly $31,000. The growth in household income, however, increased consumer house-buying power by $11,000."

Fleming notes that in 2018, the affordability tug-of-war between increasing mortgage rates and income growth was responsible for $19,000 decline in house-buying power from the previous year. 

That being said, Fleming highlights that the affordability trend shifted toward buyers in December, as mortgage rates fell, and household income continued to grow.

“The December decline in mortgage rates from 4.87 to 4.64% boosted house-buying power by an impressive $10,000,” Fleming said. “That means a home buyer with a 5% down payment and a mortgage rate of 4.6% saw their house-buying power increase from $354,500 to $364,500. The monthly increase in household income further increased house-buying power to $365,600.”

Overall, Fleming said home buying power increased by $11,100 in December compared with the previous month, marking the second largest monthly increase in home buying power since the beginning of the millennium.

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