Where Wages Grow, Affordability Follows


Written by First American Chief Economist, Mark Fleming

As 2019 came to a close, potential home buyers received a year-end gift as affordability improved relative to one year ago. Two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of increased affordability in December.

 

“While low mortgage rates and higher income boost affordability and demand for homes, it’s hard to buy what’s not for sale. That means sellers’ market conditions are likely to persist in 2020, as short supply and strong demand will drive faster price appreciation.”

The Bureau of Labor Statistics reported that average hourly earnings increased in December 2019 by 3.2 percent compared with a year ago. Wage growth results in higher household income, which means home buyers can borrow more. Compared with December 2018, household income increased by 2.2 percent, and the 30-year, fixed-rate mortgage fell by 0.9 percentage points. So, consumer house-buying power – how much one can buy based on changes in income and interest rates – continued to grow in December, which helps encourage demand.
 

Regional Household Income Differences Shape Housing Affordability

Declining mortgage rates increase affordability equally in each market, as mortgage rates are generally similar across the country. However, household income varies substantially by housing market, so comparing house-buying power with median sales price by market can provide perspective on housing affordability.
 

In the figure below, home buyers in markets below the line benefit from house-buying power that is greater than the median house price in their market – houses are relatively more affordable in these markets. Home buyers in markets above the line are less fortunate, as house-buying power is less than the median house price in these markets – houses are relatively less affordable in these markets.
 

Surprisingly, median house prices exceed house-buying power in only four markets, and they’re all coastal cities in California. Of the 44 markets we track, these four markets also have the highest nominal home prices. Yet, other housing markets also considered expensive, like Seattle, Washington, D.C., Boston and Denver, are more affordable than many believe. The list below shows the top 10 most expensive markets, measured by median sale price of a home in December 2019. Examining the list, it’s clear that the strength of median incomes in these markets helps boost house-buying power above the median house price, helping affordability.
 

City

House-Buying Power

Median Sale Price (3-month moving average)

Median Income

San Jose, CA

$806,600

$1,036,500

$128,570

San Francisco, CA

$719,979

$945,547

$114,763

Los Angeles, CA

$476,963

$641,316

$76,027

San Diego, CA

$509,882

$564,813

$81,274

Seattle, WA

$580,022

$478,486

$92,454

Boston, MA

$616,345

$459,812

$98,244

New York, NY

$532,474

$415,363

$84,875

Denver, CO

$532,161

$398,500

$84,825

Sacramento, CA

$484,041

$394,250

$77,155

Washington, DC

$702,608

$391,124

$111,994


Sellers’ Market Conditions, Faster Price Appreciation Ahead

House-buying power exceeds median house price in most of the markets we monitor in our RHPI. However, while low mortgage rates and higher income boost affordability and demand for homes, it’s hard to buy what’s not for sale. That means sellers’ market conditions are likely to persist in 2020, as short supply and strong demand will drive faster price appreciation and reduce the current levels of affordability in many markets. The question is, can house-buying power growth can keep up.
 

For more analysis of affordability, please visit the Real House Price Index.


The RHPI is updated monthly with new data. Look for the next edition of the RHPI the week of March 30, 2020.

 

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