In a recent Economic Center Blog by First American, their Chief Economist Mark Fleming delves into an analysis of the “near certainty” that the Federal Open Market Committee (FOMC) will raise the short-term Federal Funds rate on Wednesday—and what that means for first-time homebuyers.
According to Fleming, the CME group [1] estimates the probability of a 25 basis-point increase at 90.2 percent—an increase that will mainly impact those just entering the market. As most existing homeowners have a 30-year, fixed-rate mortgage, it is noteworthy that a change in short-term Federal Funds rate won’t truly make an impact for homeowners to worry about.
Although, it’s a different story for renters looking into entering homeownership. Fleming notes that for those renters that are potential homebuyers, any influence that a short-term rate change has on mortgage rates can be “materially consequential” to how much they can afford to buy.
Therefore, Fleming asks: “Which cities offer first-time homebuyers the most borrowing power?”
Using each market’s annual median renter household income, the five cities where renters have the most borrowing power are San Jose, at $490,143, San Francisco at $357,465, Washington, D.C. at $333,652, Raleigh, North Carolina at $310,007, and Seattle at $295,750.
Meanwhile, the five markets where renters have the least borrowing power are, Birmingham, Alabama, with a median renter household income at $146,140, Pittsburgh, Pennsylvania at $151,917, Buffalo, New York at $156,375, Indianapolis, Indiana at $161,490, and finally Richmond, Virginia at $162,967.
Despite borrowing power falling marginally for the potential homebuyer, Fleming’s data reports that it remains higher across all markets compared to the long-run historical average mortgage rate.
“It is easy to overlook, but the reality is first-time home buyers have greater borrowing power today than in most of the last 40 years and that won’t change, even as mortgage rates rise in 2018,” Fleming added. “So, fear not, potential first-time home buyers, the American Dream will remain within reach if mortgage rates rise next year.”
To view the full blog, click here [2].