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Wondering why low mortgage rates haven’t goosed the housing market? Here’s the answer

American household income fell in May, washing out the effect of low rates

American household income fell in May, even with the unemployment rate at the lowest level in almost 50 years.  

Median household income fell 0.6% from the prior month to $63,799, according to a report by Sentier Research on Tuesday. That’s combined gross wages plus retirement and military benefits of all people sharing a housing unit. The unemployment rate in April and May was 3.6%, the lowest since December 1969.

Stagnant or even falling wages are making it tougher for Americans to get mortgages to buy homes, evan as loan rates fall, according to Robert Dietz, chief economist for the National Association of Home Builders. While corporate profits and C-suite compensation have spiraled higher during the economic expansion, workers haven’t had much to celebrate, he said. Adjusted for inflation, household income has barely budged over the last two decades, according to Sentier Research.

“When you’re talking about affordability, you’re not just talking about mortgage interest rates – you’re talking about home prices and household income,” Dietz said in an interview. “Since the end of the Great Recession, while we’ve had a very good improvement in the unemployment rate, wage growth has been lackluster.”

Mortgage rates are near three-year lows, according to Freddie Mac. But that hasn't sparked the buying activity it has in the past, Dietz said. In the past year, there have been some months that showed acceleration in household income, but the numbers have remained “lackluster,” he said. 

“We have seen a pretty dramatic and quick decline in mortgage interest rates, but so far we haven’t seen a very noticeable uptick in home construction and home-sale activity,” Dietz said.

Corporate profits and the wages of workers moved somewhat in tandem for more than five decades following World War II, according to the Federal Reserve. In 2003, corporate profits left wages in the dust with a record spike until the Great Recession caused them to plunge below the wages of workers. Near the end of 2009, the surge in corporate profits took off again, creating another historic gap between workers and corporate profits.

“We are at a point now where real median household income is 3.4% higher than January 2000,” said Gordon Green of Sentier Research. “Not an impressive performance by any means over a period spanning almost two decades, but the overall trend line has been positive for about seven years.”

Lackluster wage growth has kept a portion of U.S. workers living from paycheck to paycheck, said Mark Zandi, chief economist of Moody’s Analytics. He pointed to a Federal Reserve report in May that said about 40% of American adults wouldn't be able to cover a $400 emergency without resorting to credit cards they couldn’t pay off right away.

“It's indicative of the financial fragility of a large chunk of the population,” Zandi said in an interview. “Probably half the population is living pretty close to the edge.” 

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