Home Prices Could Outpace Salaries, Inflation

IRVINE, CA—Low mortgage interest rates will put upward pressure on home prices, which could rise faster than salaries and inflation, First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com exclusively. After the firm's recent report tracking home-sales potential, Fleming commented that actual existing-home sales are expected to show a decline in February compared to January, while still showing positive year-over-year growth.

“Since the Federal Reserve didn't raise the benchmark rate and has lowered its rate trajectory for the rest of 2016, it's very likely we will remain in a very low mortgage-rate environment this year,” Fleming tells GlobeSt.com. “The low rates will drive leverage-assisted demand and continue to push prices higher, likely outpacing wage growth and inflation.”

With regard to the report, Fleming says while house price appreciation continues to cool modestly, the historically low rates mean borrowers can bid more for housing. “In this current market, the limited supply combined with leverage-assisted demand is driving prices higher. Actual price appreciation is currently stronger than what is fundamentally supported by market conditions. This leverage-assisted housing inflation could persist if rates remain low.”

Last month, First American mentioned that the likelihood of modest mortgage rate increases seems less likely now due to the global economic uncertainty and depressed energy markets, Fleming adds. “However, conditions have recently stabilized, if not improved slightly. Even though the Federal Reserve did not raise the benchmark federal funds rate this week, they did indicate that it is likely we shall see an increase in the federal funds rate later this year.”

Regardless of the rate-hike path, First American expects mortgage rates to increase modestly as investor demand for the 10-year Treasury bill, which truly drives mortgage rates, fades with a more certain global economic outlook. “This has the potential to impact many aspects of the housing market, from affordability to inventories, and is something that will be watched with peaked interest over the course of 2016,” says Fleming.

Back in December 2015, when the Feds decided to raise interest rates modestly, Fleming told GlobeSt.com, “While the increase in the short-term rate only indirectly influences long-term interest rates, the Fed signaled a continued modest path of rate increases. According to the model, a modest path of rate increases will moderately increase the cost of mortgage financing and reduce the pace of house-price appreciation in 2016.”

IRVINE, CA—Low mortgage interest rates will put upward pressure on home prices, which could rise faster than salaries and inflation, First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com exclusively. After the firm's recent report tracking home-sales potential, Fleming commented that actual existing-home sales are expected to show a decline in February compared to January, while still showing positive year-over-year growth.

“Since the Federal Reserve didn't raise the benchmark rate and has lowered its rate trajectory for the rest of 2016, it's very likely we will remain in a very low mortgage-rate environment this year,” Fleming tells GlobeSt.com. “The low rates will drive leverage-assisted demand and continue to push prices higher, likely outpacing wage growth and inflation.”

With regard to the report, Fleming says while house price appreciation continues to cool modestly, the historically low rates mean borrowers can bid more for housing. “In this current market, the limited supply combined with leverage-assisted demand is driving prices higher. Actual price appreciation is currently stronger than what is fundamentally supported by market conditions. This leverage-assisted housing inflation could persist if rates remain low.”

Last month, First American mentioned that the likelihood of modest mortgage rate increases seems less likely now due to the global economic uncertainty and depressed energy markets, Fleming adds. “However, conditions have recently stabilized, if not improved slightly. Even though the Federal Reserve did not raise the benchmark federal funds rate this week, they did indicate that it is likely we shall see an increase in the federal funds rate later this year.”

Regardless of the rate-hike path, First American expects mortgage rates to increase modestly as investor demand for the 10-year Treasury bill, which truly drives mortgage rates, fades with a more certain global economic outlook. “This has the potential to impact many aspects of the housing market, from affordability to inventories, and is something that will be watched with peaked interest over the course of 2016,” says Fleming.

Back in December 2015, when the Feds decided to raise interest rates modestly, Fleming told GlobeSt.com, “While the increase in the short-term rate only indirectly influences long-term interest rates, the Fed signaled a continued modest path of rate increases. According to the model, a modest path of rate increases will moderately increase the cost of mortgage financing and reduce the pace of house-price appreciation in 2016.”