Mark Fleming, the chief economist with First American, recently said, “In 2019, falling mortgage interest rates helped create a housing market that behaved very differently than the housing market in the second half of 2018.”
Mortgage interest rates began declining in December 2018 and continued falling, with occasional jumps, through October 2019. According to First American’s Housing Price Index, “the 0.85 percentage point drop in interest rates from January 2019…increased affordability by +9.7%.
Since August 2019, home prices have declined -1.3% and -5.9% y/y. according to First American’s Housing Price Index. Unadjusted house prices for single-family homes have increased +8.3% above the housing boom peak. Additionally, consumer-buying power rose +2.5% between July 2019 and August 2019, which led to consumer buying power increases of +14.8% y/y.
The translation…when consumer-buying power is factored in to home prices. prices were actually -42% below the 2006 peak and -18.6% below January 2000 prices, according to First American.
Fleming sees this data as a $40,200 improvement in house-buying power in just 8 months. “The growth in household income (+1.5% higher than in January 2019) increased consumer house-buying power by +1.5%, pushing house-buying power up an additional $5,600.”
Obviously, from Fleming’s point of view, the combined impact of lower mortgage interest rates and increasing household incomes combated rising home price appreciation in 2019.
Fleming concluded by saying, “Indeed, affordability reached its highest point since January 2018. Focusing on nominal house price changes alone as an indicator 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.”
Thanks to HousingWire’s Alcynna Lloyd for source data.