Home-affordability outlook is rosy but could be short-lived
March 25, 2019
For mortgage originators with clients who’ve been waiting for the right time to buy a home, it may be a rosy spring buying season, according to First American Financial Corp.
First American, which provides insurance and risk-management solutions for real estate transactions, released its January 2019 Real House Price Index on Monday. The index measures the price changes of single-family homes and adjusts them to account for the impacts of income and interest rate changes.
First American touts the index as an accurate measure of affordability given its adjustments for buying power and, according to the company, market trends are shifting toward buyers early this year.
“While 2018 was largely characterized by declining affordability, ending the year with a five percent yearly decline in house-buying power, this trend reversed sharply in early 2019,” said First American chief economist Mark Fleming. “Moderating home prices, in conjunction with gains in household income and declining mortgage rates, boosted affordability for potential home buyers.”
“Mortgage rates in January fell 0.18 percentage points compared with the previous month and household income increased 0.3 percent. The result? House-buying power increased 2.3 percent in January,” Fleming added. “Additionally, nominal house price appreciation in January sank to the slowest pace of growth since February 2015, according to the DataTree by First American’s House Price Index. As a result, real house prices fell 1.9 percent, the second largest monthly decline since April 2017.”
Three key factors swung toward buyers in January, Fleming noted.
The first key is the retreat in real house prices. The second key is that income levels remain on an upward tilt: Annual hourly wages rose 3.3 percent compared to January 2018, and average household income had a 3.6 percent uptick as well.
Those increases helped cushion the impact of rising mortgage rates. First American estimated that, although rate increases since January 2018 have diminished consumer homebuying power by an average of $19,000, household income growth raised homebuying power by an average of $13,000.
And rates have begun to drop, which Fleming counts as the third factor in buyers’ favor. Mortgage rates, per First American, dropped from 4.64 percent this past December to 4.46 percent in January, boosting homebuying power by an average of $7,500.
“Overall, house-buying power increased to $374,200, an impressive $8,600 gain in January compared with the previous month,” Fleming said.
There are some notable negatives, however, in First American’s report. Although real house prices and homebuying power rebounded on a month-over-month basis, real house prices still rose 7 percent year over year and house-buying power declined 1.6 percent over the same time frame. Increasing demand can easily swing the market the other way, too, according to Fleming.
“The decline in mortgage rates over the last two months and the positive impact from the strong job market and the demographic tailwind from the millennial generation aging into homeownership should translate into higher demand,” he said.
“As wages continue to grow and mortgage rates remain low going into spring, we expect demand to rise further. What happens when increasing demand for homes meets a market with tight supply? A rebound in house price appreciation appears likely, so the homebuyer power play may be short-lived.”