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Will Rising Incomes Offset High Borrowing Costs?

Rising household incomes are more than likely to offset the effects of higher borrowing costs because of rising interest rates, according to data of The Real Home Price Index (RHPI) released by First American.

According to the RHPI data, house prices increased 2.3 percent on a month-over-month basis between December 2017 and January 2018 and annually from January 2017. On a year-over-year basis, consumer house-buying power, how much one can buy based on changes in income and interest rates, increased by 3.7 percent.

“This month’s RHPI report indicates that, even though mortgage rates increased in 2017, consumer house-buying power improved by 3.7 percent in January compared with a year ago,” said Mark Fleming, Chief Economist at First American. “Household income growth has been strong enough to offset higher mortgage rates.”

Fleming said that it was reasonable to expect borrowing costs to increase as mortgage rates rose, in turn reducing consumer house-buying power, which reduces affordability. “The good news is that, even in the unlikely case that mortgage rates rise faster than expected, our housing market is well positioned to adapt,” he said.

“Under our hypothetical scenario where mortgage rates double over the next year, our analysis indicates that nominal house price growth would increase above 7 percent as the spring home-buying market heats up, and slow down to 5.8 percent by the beginning of 2019,” Fleming explained. So, even in the highly unlikely scenario where mortgage rates double over the next year, house price appreciation will not be considerably impacted.”

The index also measured the appreciation of homes by state. In January, New York, with a home price rise of 8.7 percent year-over-year showed the most significant home price appreciation. With 7.5 percent year-over-year appreciation, Nevada was ranked second with Delaware (6.6 percent); New Hampshire (6.1 percent); and Kentucky (5.5 percent) rounding off the top five states in home appreciation.

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 at national, state and metropolitan area levels. Because the RHPI adjusts for house-buying power, it also serves as a measure of housing affordability.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she 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 Houston, Texas.
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