Home Affordability: Rising Home Prices, Wages, and Mortgage Rates

Will homes be unaffordable in 2018?

Many people are concerned, rightfully so, about rising mortgage rates. However, home affordability is affected by many other factors.

According to the Freddie Mac Primary Market Survey, the 30-year Fixed Rate Mortgage rates increased more than a half of a percent, from 3.95% at the beginning of the 2018 to 4.47% on April 18th.

However, mortgage rates are just one factor, and perhaps a less significant one, that limits housing affordability. If wages increase and consumers have more money in their pocket, then any negative effect of rising mortgage rates is completely wiped away.

The third factor, and seemingly the main factor is the housing market itself. Are prices rising? Is it due to a lack of supply, higher building costs, or other economic factors. Housing prices are not uniform. When considering housing affordability it is important to look at local markets.

Mortgage Rates are Rising - Less Affordability in 2018

Mortgage rates are constantly fluctuating. Already, in 2018 mortgage rates have risen from around 4% to about 4.5%. Higher mortgage rates mean higher monthly payments. If the monthly payment is higher, than you will need more income to qualify, or you will qualify for a lower amount.

The general consensus is that mortgage rates are going to increase during 2018 and 2019. While Fannie Mae predicts that mortgage rates will go up to 4.5% by the end of 2019, the Mortgage Bankers Association predicts a much greater increase and rates will be higher than 5%.

Just how much does an increase in mortgage rates affect your interest rate? Check out using the mortgage payment calculator below

Higher Wages and More Income - Increased Home Affordability in 2018?

While it is hard to find real data about current household income, economic data shows an overall improvement in the job market. According to the Bureau of Labor Statistics, as of March 2018, the national unemployment rates are about 4.1 %. Additionally, according to data from the US Bureau of Labor Statistics, the average hourly earnings of all employees has steadily increased since 2008.

Similar to home prices and other economic factors, income varies greatly across geographic areas. Median household income in the US for 2016 was $59,039. Check out the differences across states:

Median Household Income by State (2016 data )

Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. For information on confidentiality protection, sampling error, nonsampling error, and definitions,

Housing Prices - Home Affordability in 2018

Perhaps the biggest concern for most potential homebuyers is the steady increase in home prices. On April 23, 2018, The Federal Housing and Finance Authority (FHFA) released the February 2018 Home Price Index (HPI), which posted another increase in housing prices. According to the April 2018 FHFA press release:

"From February 2017 to February 2018, house prices were up 7.2 percent. For the nine census divisions, ...The 12-month changes were all positive, ranging from +4.8 percent in the Middle Atlantic division to +10.3 percent in the Pacific division.

Although not based on current market prices, the data from Trulia Avg Listing Prices Week ending Aug 23, provides an insight into varying home prices by states:

Trulia Avg Listing Prices Week ending Aug 23

One of the biggest reasons for rising prices is the lack of homes for sale. Low inventory creates a seller's market and drives prices up.

Home Affordability 2018: Which Direction?

Although mortgage rates are increasing, the currently predicted hike should have a minor effect on homeowner’s ability to purchase a home. Rising incomes and a good economy easily offset the increased mortgage payment.

According to Mark Flemmings, Mark Fleming Chief Economist, First American

"The supply squeeze and rising mortgage rates are powerful forces working against housing affordability, but homeowners are gaining equity and the economy remains strong.

While there is room for optimism, home affordability is also affected by homeowner’s personal financial situation, including personal debt and savings levels. While personal income levels are on the rise, so are the personal non-household debt levels. Additionally, personal savings levels dropped to 2.6% of personal disposable income.

However, it is important for any household purchasing a home to carefully examine their finances and especially their debt payments. The overall debt level for households is on the rise, including credit card debt, personal loans, and student loans. If managed improperly personal household debt can negatively affect home affordability.