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The Cascading Effect of Wages on Home Affordability

The rise in jobs and wages reported by the bureau of labor statistics in late January is affecting the housing market in good ways and bad, according to the latest Real House Price Index data released by First American on Monday.

The index measures the price changes of single-family housing across the country adjusted for the impact of income and interest rate changes on consumer house-buying power (how much one can buy based on changes in income and interest rates)  over time and across the U.S. at a national, state, and city level.

The data, which was released for December 2017 showed that homes are 5 percent more expensive than they were a year ago. Real house prices on the index increased 0.4 percent in December 2017 month over month.

The index indicated that house buying power of consumers increased 5.6 percent on a year-over-year basis and by 0.1 percent from November 2017 to December 2017.

“Household income varies substantially by the housing market, so comparing house-buying power with house prices by the market can provide perspective on housing affordability,” said Mark Fleming, Chief Economist at First American. “Earlier this month, the Bureau of Labor Statistics reported that average hourly earnings increased in January by 2.9 percent compared with a year ago. Rising wages mean homebuyers can borrow more.”

However, the rising wages also raised concerns that inflation would rise and the Federal Reserve would increase rates at a faster pace than previously expected. “Consequently, the 30-year, fixed-rate mortgage rate increased to 4.4 percent last week,” said Fleming. “So, on the one hand, rising mortgage rates reduce the affordability of housing, as the cost of borrowing increases. But, on the other hand, rates are increasing because wages are rising faster than expected. Wage growth simultaneously helped and hurt housing affordability.”

The data indicated that house prices still exceed house buying power in hot markets like San Jose, San Francisco, New York, and Los Angeles. But metros like Washington, D.C., Boston, and Denver are more affordable than may believe with house prices in the $400,000 range compared to a median range of $1.2 million in San Jose or $1 million in San Francisco.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.

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