The National Association of Realtors’ Housing Affordability Index has dropped 12% in the first five months of 2015. (Source: National Association of Realtors, last accessed July 16, 2015.)
In January, the qualifying income to get a mortgage for an existing median-priced home in the U.S. was $36,576. In May, buying a median-priced home would require $41,712 in income.
Let’s be honest; incomes in the U.S. economy haven’t increased by much since the Great Recession. Average hourly earnings of employees in the U.S. increased by less than one percent (0.77% to be exact) in the first five months of 2015. (Source: Federal Reserve Bank of St. Louis, last accessed July 16, 2015.)
You see, most of the jobs created since the Credit Crisis have been in low-wage paying sectors. Will Americans working in these sectors be able to go out and buy a house? Of course not. If American incomes remain stagnant, the affordability of homes will only decline.
Interest Rates: Another Headwind for Home Buyers
While income is one factor in assessing housing market affordability, rising interest rates constitute another major factor that impacts would-be buyers. As interest rates rise, mortgage rates increase with them, and this makes homes less affordable.
From everything I hear, the Federal Reserve is adamant about starting to raise rates this year. (At this point, it may need to do so to save face.) The bond market is pointing to “higher interest rates ahead.” Just look at the chart below. It plots yields on long-term U.S. bonds, which have a major impact on mortgage interest rate pricing.
Chart Courtesy of www.StockCharts.com
Since February, yields on the 30-day U.S. bonds have increased 30%. Mortgage rates are rising as well. In the first six months of 2015, 30-year fixed mortgage rates have increased by 8.44%. Back in January of this year, they were 3.67%. In June, they reached 3.98%. (Source; Freddie Mac, last accessed July 16, 2015.)
Once the Federal Reserve actually raises rates, mortgage rates will rise further and home buyers’ affordability will be impacted even more.
Why Worry About Housing?
The housing market is a valuable component when calculating U.S. gross domestic product (GDP). It helps in consumption—home buyers buy things like furniture, lawn mowers, and so forth when they buy homes. It adds to jobs; as more homes are bought, new homes are needed to be built and older homes have to be renovated. Thus, the number of construction-related jobs rises.
But how can you have a healthy housing market when home affordability is declining, incomes aren’t rising, and interest rates are about to rise? It is no wonder first-time home buyers are making up less and less of the percentage of homes sold.
With this in mind, don’t expect the general housing market to rise in price in 2015. I’m not talking about luxury U.S. homes; I’m talking about the median price of a U.S. home in American cities outside of hot beds like New York, Silicon Valley, Seattle, and other rising income areas. If anything, housing could be a drag here on U.S. GDP in the third and fourth quarters of this year.