First American: Low Rates, Wage Growth Boosting Home Buyers

Despite rising home prices and shrinking housing inventories, other factors such as low interest rates and wage growth have benefited home buyers, said First American Financial Corp., Santa Ana, Calif.

The company’s monthly Real House Price Index said these factors combined to give home buyers more buying power in May. It said consumer house-buying power–how much one can buy based on changes in income and the interest rate–increased by 0.5 percent between April and May, although it fell by 4.5 percent year-over-year. Real house prices decreased by 0.5 percent between April and May but increased by 10.2 percent year-over-year.

“Consumer house-buying power improved [in May] because of the small decline in the 30-year, fixed-rate mortgage and modest wage gains,” said First American Chief Economist Mark Fleming. “The improvement in buying power offset the gains in unadjusted house prices, so affordability improved, albeit just barely.”

As a result, Fleming said, “Prospective homebuyers benefited in May as homes became more affordable. Despite the tight supply and strong demand, real home prices remain well below housing boom peak levels. But year over year affordability declined. “Compared to a year ago, affordability is declining as the low supply of existing homes listed for sale and the slow pace of new home construction relative to demand is resulting in higher unadjusted house prices.”

The index 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.

The report said real house prices are 34.2 percent below their housing-boom peak in July 2006 and 11.5 percent below the level of prices in January 2000. Unadjusted house prices increased by 5.3 percent in May on a year-over-year basis and are 3.1 percent above the housing boom peak in 2007.

The report said real house prices increased in all but one of the metropolitan areas tracked by First American on an annual basis: Houston, where RHPI fell -0.7 percent. Half of the metropolitan areas tracked by First American had double digit declines in affordability. Affordability in Charlotte, N.C. declined the most, dropping 16.5 percent in the last 12 months.

The report said states with the greatest year-over-year increase in the RHPI are New York (+17.9 percent), Nevada (+15.5 percent), Michigan (+12.9 percent), Colorado (+12.8 percent) and Vermont (+12.8 percent). States with the smallest increase are Arkansas (+3.3 percent), Kansas (+4.3 percent), Montana (+4.4 percent), Nebraska (+5.1 percent), and Oklahoma (+5.2 percent).

Among metro areas tracked by First American, markets with the greatest year-over-year increase in the RHPI are Charlotte, N.C. (+16.5 percent), Nashville, Tenn. (+14.8 percent), Seattle (+14.6 percent), Tampa, Fla. (+14.2 percent), and Denver (+13.9 percent). The only market with a year-over-year decrease in the RHPI is Houston (-0.7 percent).