First American: Global Economic Turmoil Boosts Consumer House-Buying Power

Isaac Newton’s Third Law of Motion: “For every action, there is an equal and opposite reaction.” Apparently, it applies to housing as well.

First American Financial Corp., Santa Ana, Calif., said economic turmoil in the wake of the U.K.’s Brexit vote has had positive effects for U.S. homebuyers. The company’ Real House Price Index said rising household incomes and falling mortgage rates are currently boosting consumer house-buying power in many major metropolitan markets, offsetting any nominal gains in price levels,

“The yield on the 10-year Treasury note hit record lows on the back of the ‘Brexit’ vote, uncertainty around the future of the European Union, and economic concerns in China,” said First American Chief Economist Mark Fleming. “In the short term, the global economic turmoil is paradoxically having a positive impact on housing affordability and the health of the housing market in the form of almost historically low mortgage rates.”

The report said real house prices declined on a month-over-month basis in 15 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. San Francisco, Washington, D.C, and Boston led the pack in terms of real house price declines and improved affordability, each experiencing month-over-month declines of 1 percent.

“Counter to the conventional wisdom that housing is becoming less affordable in these markets, many consumers that were house hunting benefitted from an improvement in affordability in May,” Fleming said.

The RHPI measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time and across the United States at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

For May, the RHPI was unchanged from April and increased by 0.4 percent from a year ago. Real house prices are 39.7 percent below their housing-boom peak in July 2006 and 19 percent below the level of prices in January 2000. Unadjusted, the national price level is 3.0 percent away from the housing-boom peak in 2007.

Fleming said demand for U.S. Treasury bonds remains at a record high as both domestic and foreign investors, still reeling from the outcome of the Brexit vote and grappling with greater global economic uncertainty, search for safety. “This is compounded by negative yields on government bonds in Germany, Japan, Switzerland and elsewhere, which make even the record low yields on U.S. treasuries attractive by comparison,” he said. “The low yields on U.S. treasuries have kept mortgage rates marching downwards with the 30-year, fixed-rate mortgage remaining under 4.0 percent since July 2015. The housing market has benefitted with the low rates fueling increases in consumer house-buying power and keeping real house prices low by historic standards.”

First American reported states with the highest year-over-year increase in the RHPI are Wyoming (+10.6 percent), North Dakota (+10.3 percent), Nevada (+9.3 percent), Delaware (+5.4 percent) and Michigan (+4.6 percent). States with the highest year-over-year decrease in the RHPI are New Jersey (-3.4 percent), Pennsylvania (-3.1 percent), Nebraska (-3.0 percent), Virginia (-2.8 percent) and Iowa (-2.7 percent).

Among the largest 50 Core Based Statistical Areas, markets with the highest year-over-year increase in the RHPI are Jacksonville, Fla. (+11.9 percent), Tampa, Fla. (+8.7 percent), Seattle (+6.8 percent), Denver (+6.3 percent), and Sacramento, Calif. (+6.0 percent). Markets with the highest year-over-year decrease in the RHPI are Virginia Beach, Va. (-2.2 percent), Baltimore (-1.7 percent), Philadelphia (-1.7 percent), Richmond, Va. (-1.2 percent), and Oklahoma City (-1.1 percent).

“While a lack of inventory is still problematic, the improvements in affordability, caused by a combination of low mortgage rates and job growth are helping the market reach its potential for home sales,” Fleming said. “A rise in estimated median household incomes is also playing a large role in certain key markets that from a nominal standpoint seem expensive. For example, the increases in estimated median household incomes in both Dallas and San Francisco were enough to offset unadjusted price gains and bring meaningful affordability improvements in real terms to both markets.”