Affordability is Improving Even as Mortgage Rates Rise
A very informative, eyebrow raising survey was released on May 10th, 2018 by the National Association of Homebuilders NAHB/Wells Fargo Housing Opportunity Index.
The survey informs us that while mortgage rates have risen 30 basis points, from 4.06 to 4.34 in the first quarter of 2018 compared to the last quarter of 2017, home affordability has improved. How can this be when we also consider that average and median home prices have risen in the first quarter of this year compared to the first quarter of 2017?
According to the NAHB report, “Strong wage growth has more than offset an increase in mortgage rates which in turn boosted nationwide affordability.” The report found that, “61.6% of new and existing homes sold between the beginning of January and the end of March were affordable to families earning the median U.S. income of $71,900.” Very importantly, this represented an increase from the fourth quarter of 2017 when only 59.6% of homes were affordable to median income earners. While the two percent increase may not seem like much, the figure represents about 2 million families.
The findings are in line with a study conducted by Sentier Research, a software and economic forecasting firm. According to Sentier, which tracks income on a monthly basis, median household income is now the highest it has been in the last fifty years, when adjusting for inflation.
NAHB Chairman Randy Noel attributes this improved affordability to, “Continued job growth, rising wages, and strong consumer confidence which are fueling housing demand. In turn this should lead to more buyers entering the housing market in the coming months. Mr. Noel does however point out that markets are never perfect. Current headwinds include labor and lot shortages, rising prices for building materials, and excessive regulations.” But Mr. Noel believes that these issues pale in comparison to the rise in wage growth which should bolster an already healthy real estate market. (For example, the Florida Realtors trade group reported that single family home prices at the end of the first quarter of 2018 was $248,00, up 9.7% compared with the first quarter of 2017.
According to NAHB chief economist, Robert Dietz, the current U.S. median family income referenced earlier ($71,900) represents an increase of an impressive 5.7% from $68,000 a year earlier. “This wage [increase] helped to boost housing affordability. A growing economy, along with tight inventories and increased household formations will lift housing production in the year ahead.” He adds that as mortgage rates continue to rise, this will place downward pressure on affordability. But Dietz concurs with Noel, that wage growth will boost the residential real estate market.
The report also alerts us to the broadness of the uptick. Of the 237 metropolitan areas studied in the first quarter of 2018, 167 of the markets registered a gain in affordability, 68 posted a loss, and 2 were unchanged compared with the fourth quarter of 2017.