Foreign Investment Provides Stimulus to U.S. Consumer Home-Buying Power

First American Financial Corp., Santa Ana, Calif., said counter to conventional wisdom that housing is becoming less affordable in most markets, many house-hunters reaped the benefit of improving affordability in June–thanks in part to foreign investors.

But it’s not what you might think. First American Chief Economist Mark Fleming said the boon comes not from foreign investors in real estate, but instead a foreign investment flight to quality, i.e. U.S. Treasuries. As a result, he said, demand for Treasuries is keeping mortgage rates low, which in turn helps U.S. home buyers.

“The monetary stimulus and negative interest rate policies of several central banks outside the U.S. continue to drive demand for U.S. Treasury bonds as investors search for positive yields, despite abating concerns over the fallout from Brexit,” Fleming said. “As a result, the yields on U.S. Treasuries remain at depressed levels and are keeping U.S. mortgage rates at record low levels. The 30-year, fixed-rate mortgage averaged 3.57 percent in June 2016. These historically low mortgage rates and surging house-buying power are contributing to gains in affordability that many people overlook.”

The company’s June Real House Price Index decreased slightly, falling by -0.2 percent from May and by -0.1 percent from a year ago. Real house prices declined on a year-over-year basis in 27 of the 43 metropolitan areas tracked by First American, as increases in consumer house-buying power were sufficient to more than offset unadjusted price appreciation.

Unadjusted house prices are expected to increase by 5.1 percent in June on a year-over-year basis, Fleming said. “After adjusting for increased consumer house-buying power, real house prices are significantly lower than they were prior to the housing boom,” he said, noting real house prices are 38.5 percent below their housing-boom peak in July 2006 and 17.3 percent below the level of prices in January 2000. Unadjusted, the national price level is 2.6 percent away from the housing-boom peak in 2007.

The report said states with the highest year-over-year increase in the RHPI are Wyoming (+7.0 percent), Nevada (+4.8 percent), North Dakota (+4.6 percent), Michigan (+3.7 percent) and Delaware (+2.4 percent). States with the highest year-over-year decrease in the RHPI are Mississippi (-7.0 percent), New Jersey (-6.0 percent), Iowa (-5.8 percent), Nebraska (-5.6 percent) and North Carolina (-5.2 percent).

Among the largest 50 metro areas, markets with the highest year-over-year increase in the RHPI are Jacksonville, Fla. (+10.3 percent), Tampa, Fla. (+6.5 percent), Charlotte, N.C. (+4.1 percent), Sacramento, Calif. (+3.5 percent) and Orlando, Fla. (+3.3 percent). Markets with the highest year-over-year decrease in the RHPI are Virginia Beach, Va. (-4.9 percent), Oklahoma City (-3.4 percent), Washington, D.C. (-3.2 percent), San Francisco (-3.0 percent) and Milwaukee (-2.9 percent).

“Gains in affordability, caused by a combination of low mortgage rates and recent improvements in wage growth, are helping the market reach its potential for home sales,” Fleming said. “Many markets that are often listed as the most expensive for housing are not as expensive as many believe when one accounts for the strong growth in household income within these markets.”

For example, Fleming said, an increase in the estimated median household incomes in both Dallas and San Francisco were enough to offset house price gains, increasing consumer buying-power and bringing meaningful affordability improvements in real terms to both markets. “Rising household incomes and falling mortgage rates strengthened consumer house-buying power and affordability in many major metropolitan markets in June,” he said. “Improving affordability for consumers often occurred in markets traditionally depicted as expensive or over-priced. Consumer buying-power-adjusted prices actually fell in these markets, thanks to rising incomes and low mortgage rates.”