First American: Wage growth crucial to affordability in 2020

Wage growth will be the key to house-buying power in 2020, according to First American Financial Corp.

As home prices have gained momentum because of the imbalance between supply and demand, household incomes keeping pace will be crucial to maintaining affordability, said Mark Fleming, chief economist at First American. Consider October 2019, when affordability grew despite nominal price appreciation accelerating year over year.

“Affordability improved in October as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, modestly swung in favor of increased affordability relative to one year ago,” Fleming said. “The 30-year, fixed-rate mortgage fell by 1.1 percentage points and household income increased 2.6% compared with October 2018. Rising household income and declining mortgage rates each boost consumer house-buying power.”

Annual hourly wage growth saw a 3.2% bump in October compared with the same month last year, contributing to a rise in household income that pushed consumer house-buying power up by $9,300, Fleming added. That’s big from an affordability standpoint; while unadjusted home prices now sit 9.6% above their housing boom peak from 2006, “real” home prices (adjusted for house-buying power) remain 41% below their housing boom high.

As the year comes to an end, the outlook for the labor market remains strong, with job creation continuing and wages still on the upswing — signs that house-buying power can outpace the nominal house price appreciation, at least for now.

Good thing, too, with an influx of buyers looking to flood an already constrained market.

“The bulk of the millennial generation, America’s largest generation, will turn 30 next year, entering their prime home-buying years,” Fleming explained. “This generation of buyers grew up in an era of sub-4 percent mortgage rates and also have higher household incomes than their predecessors. Financial readiness combined with a heightened appetite for homeownership will power continued demand for homes in 2020.”

That dynamic will only hasten home price acceleration, per Fleming, making wage growth even more critical in the coming year.

“While rising house-buying power, largely driven by declining mortgage rates, made monthly mortgage payments more manageable in 2019, any further increases in house-buying power will likely rest on the labor market and continued household income growth in 2020,” he said.


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