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Housing Affordability Constrained by Lack of Income Growth

tightenup-on-moneyWith household income lagging and home prices continuing their upward climb, fewer buyers are able to afford a home in today's housing market.

Fannie Mae’s Home Purchase Sentiment Index (HPSI) showed that consumers are being squeezed out of the housing market due to low income growth.

Wage growth, which has lagged in recent months, jumped by $0.12 over-the-month in January up to $25.39 and by 2.5 percent since the previous January. The ADP Employment Report for January 2016, released on Thursday, reported much better numbers than the BLS, with 205,000 private sector jobs added. The labor participation rate, which had fallen to its lowest levels since the 1970s, ticked up slightly to 62.7 percent in January.

“As the labor market tightens, we should continue to expect strong gains in wages in 2016,” Trulia Chief Economist Ralph McLaughlin said. “However, while wage growth is good news for households, price and rent increases of 3 to 4 percent during the same period have completely offset these wage gains.”

NAFCU Chief Economist Curt Long stated, “While nominal wage growth is still slightly below historical norms, it is still outpacing inflation by a decent margin. Moreover, we have seen meaningful improvements in the participation rate over the past six months which suggests that more sidelined workers are being brought back into the labor pool.”

hpsiAccording to Fannie Mae, the HPSI decreased 1.7 points to 81.5 in January and is down 1.3 points year-over-year.

The net share of survey respondents who reported significantly higher household income compared to a year ago fell 3 percentage points to 12 percent. Meanwhile, those that indicated that now is good time to buy a home also fell 4 percentage points to 31 percent. Only 61 percent said that it is a good time to buy a home, equal to the all-time survey low.

The index found that respondents that believe now is a good time to sell a home increased 1 percentage point to 9 percent.

“Housing affordability is being constrained because the pace of growth in real income has not kept up with gains in real home prices as demand has grown faster than supply,” said Doug Duncan, SVP and Chief Economist at Fannie Mae. “On the bright side, consumers have been increasingly positive about their ability to get a mortgage, suggesting that credit tightness is not the main issue limiting housing market activity today, a feeling that we also see conveyed by lenders in our Mortgage Lender Sentiment Survey."

Those that say home prices will increase declined 3 points to 37 percent, and the net share of those who say mortgage interest rates will go down remained at negative 52 percent this month.

The net share of respondents who unconcerned with losing their job fell 1 percentage point to 71 percent, the report said. An all-time survey high was met as 85 percent of respondents say they are not concerned about losing their job.

Duncan noted, "We expect further progress in the HPSI to be limited until income growth picks up or supply, particularly in lower-priced homes, expands more rapidly."

Click here to view the full report.

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