SANTA ANA, CA—While rising interest rates decrease home-buying power, it's also important to note that rising incomes can offset that decrease, First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com. In a recent report from the frim, Fleming said that unadjusted house prices increased by 6% in November 2017 on a year-over-year basis and are 6.3% above the housing boom peak in 2007, while over the same 12-month period, household incomes have increased by only 2.8%.
But Fleming also said in the report that the important thing to look at is buying power. “In fact, consumer house-buying power is 2.3 times higher than it was in 2000, almost two decades ago. It's also only 2.9% below the peak in July 2016.”
He added that because the long-run trend in mortgage interest rates has been downward, from a peak of 18% in 1981, the housing market has benefited from consistently increasing house-buying power. “Home buyers today have historically high levels of house-purchasing power, and that's one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is overstated for now.”
We spoke with Fleming about the affordability crisis and where he sees purchasing power going in the near future.
GlobeSt.com: While it seems the affordability crisis is overstated for now, what in the future would indicate that it's not overstated?
Fleming: I think the key indicator would be a significant decline in home-buying power, but at the moment, thanks to low-interest rates and increasing wages, home-buying power is near a record high.
GlobeSt.com: Purchasing power has increased, in part, due to a declining trend in interest rates since 1981, but with rates beginning to rise, do you see this power decreasing significantly in the near future?
Fleming: I expect rising interest rates will decrease home-buying power, but it's also important to note that rising incomes can offset that. In fact, just today, the Bureau of Labor Statistics employment-situation report indicated wages increased 2.9% in January compared with a year ago, which is the fastest pace of growth since June 2009. The overall change in home-buying power will depend on how much each of these changes.
GlobeSt.com: How do you see household income changing over the next year or two?
Fleming: One reason why interest rates are rising is because of economic strength. A growing economy and low, actually very low, unemployment should help to accelerate the growth of household income in the near future.
GlobeSt.com: What else should our readers take away from your latest Real House Price Index?
Fleming: Home buyers today have historically high levels of house-purchasing power, and that's one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is overstated for now.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
