The three key drivers of the Real House Price Index (RHPI) are household income levels, the 30-year, fixed mortgage rate, and the unadjusted house price index. Changes to household income levels and the 30-year, fixed mortgage rate are considered together as consumer house-buying power. When household income rises and/or the mortgage rate falls, consumer house-buying power increases.
The Real House Price Index (RHPI) views house prices in relation to consumer house-buying power, incorporating household income, mortgage rates, and an unadjusted house price index. When incomes rise, consumer house-buying power increases. When mortgage rates or house prices rise, consumer house-buying power declines.
As the home-buying season continues, the inventory of homes for sale remains historically low, while demand is increasing. Not surprisingly, house prices continue to rise. In March, unadjusted house prices increased by 6.4 percent compared with a year ago and they are now 8.7 percent above the housing boom peak for unadjusted house prices reached in 2007. But, does that tell the real story?
At the May Federal Reserve (Fed) meeting last week, all eyes were on the 10-year Treasury yield. In late April, that yield topped 3 percent for the first time in more than four years. With yields on the rise, housing market participants expect this to mean higher interest rates from central banks. It’s often overlooked that the popular 30-year, fixed-rate mortgage is benchmarked to the 10-year Treasury bond. In fact, as shown in the chart below, since the end of the recession, the 30-year, fixed-rate mortgage has on average remained 1.7 percentage points higher than the 10-year Treasury bond yield. So, if that trend remains consistent, if the 10-year Treasury yield rises above 3 percent, then the 30-year, fixed-rate mortgage rate should also rise to 4.5 percent.
“The recent increase in the 10-year Treasury yield indicates higher mortgage rates are likely in the very near future. But, even as mortgage rates increase, we remain well below the historical average of about 8 percent for a 30-year, fixed-rate mortgage – and house-buying power remains strong.”
As expected, the Federal Open Market Committee increased the Federal Funds rate last week, and signaled they expect to increase rates further later this year. It’s clear we have entered the rising interest rate environment that many have been predicting for years. With rising rates the new reality for the housing market, earlier this month we examined the possible impact of a dramatic increase in 30-year, fixed-rate mortgage rates on the market potential for sales. We found that even doubling the mortgage interest rate may only reduce the market potential for home sales by about 5 percent.
Earlier this month, the Bureau of Labor Statistics reported that average hourly earnings increased in January by 2.9 percent compared with a year ago. This was a big splash of economic news that had ripple effects on the housing market, as the 2.9 percent increase in wages surpassed expectations.
That nominal house prices are growing faster than household incomes is often used as the basis for arguing that we are facing an affordability crisis. It is true that unadjusted house prices grew faster than income between November 2016 and November 2017. Our Real House Price Index (RHPI) showed that unadjusted house prices increased by 6.0 percent in November on a year-over-year basis and are 6.3 percent above the housing boom peak in 2007. Over the same 12-month period, household incomes have increased by significantly less, 2.8 percent.
First American’s proprietary Real House Price Index (RHPI) looks at October 2017 data and includes analysis from First American Chief Economist Mark Fleming on the market forces that are keeping a lid on affordability.
First American’s proprietary Real House Price Index (RHPI) looks at September 2017 data and includes analysis from First American Chief Economist Mark Fleming on the market forces that sparked a surprising increase in affordability in September.
Amazon’s very public search to identify the best location for its second headquarters made me wonder - what criteria would be helpful for young professionals when making their personal decision on where to live and work? Affordable housing would be important. For example, you can buy so much more home in Texas or Ohio than you can in California. But, when making the decision about where to live, considering what and how many job opportunities exist is also a critical point. The most attractive places to live for young professionals would be where housing costs are reasonable and great job opportunities are abundant. In other words, the top cities for economic opportunity.