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Wage Growth and the Affordability Crisis

Hand Grabbing House BHThe latest First American Real House Price Index revealed that affordability has strengthened on a national level.

Real house prices increased 0.7 percent between September 2016 and October 2016, which is a 0.4 percent decrease from September 2015. Real house prices are 39.9 percent below their housing boost peak in July 2006 and 19.2 percent below the level of prices in January 2000. The unadjusted national price level is 0.01 percent below the housing-boom peak in 2007, according to the report.

First American reported that real house prices decreased on a year-over-year basis in the month of October as mortgage rates were still significantly lower than last year, falling from 3.80 percent to 3.47 over the 12-month period. Wages grew 2.8 percent year-over-year in October, which was the fastest pace since the beginning of the financial crisis. However, increasing mortgage rates and rising house prices have put pressure on real prices in various local housing markets.

Mark Fleming, Chief Economist for First American, discussed the components that will contribute to affordability in 2017. “In 2013, we saw the significant slowing effect the ‘taper-tantrum’ had on unadjusted house prices. We expect unadjusted prices to respond similarly to the recent increases in mortgage rates, though to a lesser degree this time,” he said. “While mortgage rates above 4 percent reduce affordability, accelerating wage growth and the expected slowdown in unadjusted price appreciation are both beneficial for affordability. I expect the net effect on consumer house-buying power to remain modest.”

Home prices have decreased on a year-over-year basis in only 8 of the 43 metropolitan areas tracked in the report, as tight supply continues to drive up unadjusted prices, which have yet to slow in response to the recent increases in mortgage rates.

Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest year-over-year increase in the RHPI are: Charlotte (+9.8 percent); Jacksonville, Florida (+9.8 percent); Tampa (+7.5 percent); Columbus (+6.6 percent); and Detroit (+5.8 percent). Markets with the highest year-over-year decrease in RHPI were San Francisco (-5.3 percent); Virginia Beach, VA (-4.0 percent); San Jose (-2.4 percent); Milwaukee (-0.9 percent); and Baltimore (-0.5 percent).

Fleming discussed how fixed-rate mortgages will impact first-time homebuyers. “Preceding the FOMC meeting earlier this month, we assessed the impact of rate changes on real house prices and affordability looking ahead to the end of 2017. While existing homeowners with fixed-rate mortgages will feel no affordability impact, potential first-time homebuyers will have to adjust their expectation for what they can afford. The post-election rate increase, as well as the expected path of FOMC Federal Funds rate increases next year, leads me to forecast a 4.4 percent increase in real prices by the end of next year,” he said.

About Author: Mirasha Brown

Mirasha Brown is a graduate of Florida A&M University and is pursuing a masters degree at Syracuse University. Born and raised in Florida, she has contributed to public relations and marketing campaigns for Rent The Runway and Billboard. She is a communications specialist with The Five Star and a contributing writer to DS News and the MReport.

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