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The Three Factors Driving Housing Affordability

A report by First American reveals the three key factors responsible for the rising real house prices appreciation and reducing affordability in several areas across the nation. The First American Real House Price Index (RHPI), a report based on three key drivers-household income, mortgage rates, and an unadjusted house price index-found that real house prices saw an increase of 2.0 percent between August 2018 and September 2018, with a 15.3 percent surge year over year.

On the other hand, consumer house-buying power measuring purchasing power based on changes in income and interest rates, decreased 0.9 percent between August 2018 and September 2018 with a decline of 6.7 percent year over year.

The average household income, however, is up by 2.9 percent since September 2017 and 53 percent since January 2000. Real house prices are 37.0 percent below their housing boom peak in August 2006 and 11.0 percent below the level of prices in January 2000.

Mark Fleming, Chief Economist at First American said, “Without stronger household income growth, rising mortgage rates will continue to impede consumer house-buying power, reducing affordability.” He also stated that “all three key drivers of the RHPI increased compared to the previous year.”

Speaking of mortgage rates, Fleming indicated that rising mortgage rates impede consumer house-buying power and impact both housing supply and demand resulting in limited supply and flattened demand. An increased household income at par or greater than the mortgage rates seems to be the only solution to mitigating the loss for many homebuyers.

The report found that the increase in mortgage rates reduced house-buying power by $36,000  and household income growth increased consumer house-buying power by $10,000 since September 2017. This led to an overall decline in house-buying power by $26,000 in September compared with a year ago. The pace of household income growth is not sufficient to fully offset the change in the mortgage rate, the report noted.

The top five local markets with the highest year-over-year growth in the RHPI in September 2018 are Cleveland, Ohio +28.2 percent; Las Vegas, Nevada (+26.6 percent); Cincinnati, Ohio (+23.8 percent); Atlanta, Georgia (+23.4 percent); and Orlando, Florida (+22.6 percent).

The five states with the greatest year-over-year increase in the RHPI are Ohio (+21.1 percent), Nevada (+20.7 percent), Georgia (+19.9 percent), New Jersey (+19.1 percent), and New Hampshire (+18.8 percent).

About Author: Donna Joseph

Donna Joseph is a Dallas-based writer who covers technology, HR best practices, and a mix of lifestyle topics. She is a seasoned PR professional with an extensive background in content creation and corporate communications. Joseph holds a B.A. in Sociology and M.A. in Mass Communication, both from the University of Bangalore, India. She is currently working on two books, both dealing with women-centric issues prevalent in oppressive as well as progressive societies. She can be reached at donna.joseph@thefivestar.com.
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