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First American: Homes are still affordable

The U.S. housing market remained broadly affordable in July, and will remain so even if mortgage rates hit 5 percent as predicted next year, according to the title company First American.

Because of rising incomes, consumer house-buying power increased in July despite higher rates and home prices, and still compares well to history, the company’s Chief Economist Mark Fleming said.

“Average household incomes are 53 percent higher today than in January 2000,” Fleming said. “On the other hand, the 30-year, fixed mortgage rate remains near its historic low point. As a result, consumer house-buying power is still 2.2 times higher today than in January 2000.”

First American’s real price index — which adjusts nominal home-price growth by factoring in the change of incomes and mortgage rates — registered no change in July.  In July, the index was 38 percent below the housing boom peak in July 2006, and 12 percent below the level of prices in January 2000. However, affordability has eroded. Real home prices increased by 12 percent in the 12 months through July. Consumer house-buying power — what is affordable to a person earning the median wage — fell by roughly 4 percent over the year.

Fleming said that another half percentage point increase to the 30-year fixed mortgage would likely only have a modest impact on affordability, though.

“It’s evident that rising mortgage rates have an impact on affordability,” Fleming said. “However, the root cause of higher inflation and, in turn, rising mortgage rates is surging wage growth.”


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