Household Income Trends and Home Affordability

IRVINE, CA—In 2015, we saw a surge in household-income growth that was even greater for lower-income households, but First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com he doesn't expected growth to be sustained at that level. In a recent report from the firm, Fleming said, “The shortage of inventory listed for sale continues to be problematic; however, the gains in affordability are helping the market reach its potential for home sales. A rise in estimated median household incomes is also playing a large role in certain key markets that otherwise seem expensive when just considering nominal house prices and not factoring in the boost in buying power provided by increased income levels in those markets. Again [in September], increases in estimated median household incomes in both Washington, DC, and San Francisco—markets conventionally considered unaffordable—were enough to offset unadjusted price gains and bring meaningful affordability improvements in real terms to both markets.”

We spoke exclusively with Fleming about his expectations on income increases in markets throughout the country and how this will continue to affect home affordability in those markets.

GlobeSt.com: What's expected regarding income increases in markets across the country?

Fleming: In 2015, we saw a surge in household income growth that was even greater for lower-income households, but I don't expect that growth to be sustained at that level. In a healthy labor market, income growth will usually grow a couple of percentage points above inflation. So, 3% to possibly 4% annual household income growth (1% to 3% percent inflation adjusted) is a reasonable and healthy expectation.

GlobeSt.com:  How will these expected levels of increases affect home affordability in those markets?

Fleming: One of the main reasons that we are reporting in our proprietary Real House Price Index a 4.8% decline, as opposed to the S&P Case-Shiller 5% nominal unadjusted increase reported [last week], is that we take into account the affordability-increasing benefits of income growth and falling interest rates. Rising incomes help to increase consumer home purchasing power and increase affordability. This year, the big gain in household income has been very beneficial to affordability. 

GlobeSt.com: What are the major factors leading to income increases?

Fleming: As James Carville, a Bill Clinton political aide, famously said, “It's the economy, stupid.” Steady economic growth, and job creation in particular, is the primary driver of income growth. We have seen more than 16 million jobs created since the bottom of the Great Recession, an unemployment rate that has fully recovered, and that is finally translating into upward pressure on wages and household incomes.

GlobeSt.com: What else should our readers know about income increases and home affordability?

Fleming: The traditional perspective on affordability is fixated on actual house-price levels and changes in those prices, which doesn't take into account what really matters to potential buyers: their purchasing power or how much they can afford to buy. Our proprietary Real House Price Index adjusts prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow. In short, real house prices are still 39.7% below the peak in 2006 and even 21.5% below the level of prices in 2000. On a purchasing power-adjusted basis, houses are as affordable as they have been in almost a quarter century.

IRVINE, CA—In 2015, we saw a surge in household-income growth that was even greater for lower-income households, but First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com he doesn't expected growth to be sustained at that level. In a recent report from the firm, Fleming said, “The shortage of inventory listed for sale continues to be problematic; however, the gains in affordability are helping the market reach its potential for home sales. A rise in estimated median household incomes is also playing a large role in certain key markets that otherwise seem expensive when just considering nominal house prices and not factoring in the boost in buying power provided by increased income levels in those markets. Again [in September], increases in estimated median household incomes in both Washington, DC, and San Francisco—markets conventionally considered unaffordable—were enough to offset unadjusted price gains and bring meaningful affordability improvements in real terms to both markets.”

We spoke exclusively with Fleming about his expectations on income increases in markets throughout the country and how this will continue to affect home affordability in those markets.

GlobeSt.com: What's expected regarding income increases in markets across the country?

Fleming: In 2015, we saw a surge in household income growth that was even greater for lower-income households, but I don't expect that growth to be sustained at that level. In a healthy labor market, income growth will usually grow a couple of percentage points above inflation. So, 3% to possibly 4% annual household income growth (1% to 3% percent inflation adjusted) is a reasonable and healthy expectation.

GlobeSt.com:  How will these expected levels of increases affect home affordability in those markets?

Fleming: One of the main reasons that we are reporting in our proprietary Real House Price Index a 4.8% decline, as opposed to the S&P Case-Shiller 5% nominal unadjusted increase reported [last week], is that we take into account the affordability-increasing benefits of income growth and falling interest rates. Rising incomes help to increase consumer home purchasing power and increase affordability. This year, the big gain in household income has been very beneficial to affordability. 

GlobeSt.com: What are the major factors leading to income increases?

Fleming: As James Carville, a Bill Clinton political aide, famously said, “It's the economy, stupid.” Steady economic growth, and job creation in particular, is the primary driver of income growth. We have seen more than 16 million jobs created since the bottom of the Great Recession, an unemployment rate that has fully recovered, and that is finally translating into upward pressure on wages and household incomes.

GlobeSt.com: What else should our readers know about income increases and home affordability?

Fleming: The traditional perspective on affordability is fixated on actual house-price levels and changes in those prices, which doesn't take into account what really matters to potential buyers: their purchasing power or how much they can afford to buy. Our proprietary Real House Price Index adjusts prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow. In short, real house prices are still 39.7% below the peak in 2006 and even 21.5% below the level of prices in 2000. On a purchasing power-adjusted basis, houses are as affordable as they have been in almost a quarter century.