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Real Estate

First American says these two factors have re-shaped U.S. housing affordability

First American attributes August's affordability uptick to low mortgage rates and income growth

In August, home prices fell 1.3%, declining 5.9% year over year, according to First American’s Real House Price Index.

According to First American’s data, unadjusted house prices sit 8.3% above the housing boom peak. Whereas consumer buying power rose 2.5% between July and August, increasing 14.8% year over year.

This means when consumer house-buying power is factored in, home prices are actually 42% below their 2006 peak and 18.6% below prices from January 2000.

Throughout the year, the dynamic duo of low mortgage rates and rising household income have transformed the nation’s housing affordability, said First American Chief Economist Mark Fleming.

“In 2019, falling mortgage rates helped create a housing market that behaved very different than the housing market in the second half of 2018. Mortgage rates began their descent in December 2018 and have continued to fall through August, significantly influencing affordability,” said Fleming. “According to our RHPI, the 0.85 percentage point drop in mortgage rates from January 2019 through August 2019 increased affordability by 9.7%.”

Fleming said this translates to a $40,200 improvement in house-buying power in just eight months.

“As rates have fallen in 2019, the economy has continued to perform well also, resulting in a tight labor market and wage growth. Wage growth pushes household incomes upward, which were 1.5% higher in August compared with January,” said Fleming. “The growth in household income increased consumer house-buying power by 1.5%, pushing house-buying power up an additional $5,600.”

According to Fleming, this has combated the impact of rising house price appreciation on housing affordability throughout 2019.

“Indeed, affordability reached its highest point since January 2018,” said Fleming. “Focusing on nominal house price changes alone as an indication of changing affordability, or even the relationship between nominal house price growth and income growth, overlooks what matters more to potential buyers – surging house-buying power driven by the dynamic duo of mortgage rates and income growth. And, we all know from experience, you buy what you can afford to pay per month.”

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