Economic Uncertainty Fuels House-Buying Power

Record-low yields on U.S. treasuries are keeping mortgage rates down near all-time lows, which in turn is driving increases in house-buying power and keeping real house prices low compared with historic standards, according to First American Financial Corporation’s Real House Price Index (RHPI) for May 2016 released Monday.

Freddie Mac reported in its Primary Mortgage Market Survey for the week ending July 21 that interest rates had slightly recovered from post-Brexit volatility and that the average 30-year FRM had ticked up by 3 basis points to 3.45 percent, which is still only 14 basis points above the all-time record low of 3.31 percent set in 2012. The average 30-year FRM has been below 4 percent since July 2015, and Freddie Mac predicts it will remain below 4 percent for the near term.

Domestic and foreign investors that are grappling with global economic uncertainty, compounded by negative yields on government bonds in such countries as Germany, Japan, and Switzerland, and others, are searching for safety—which has caused demand for U.S. Treasury bonds to surge to a record high, according to First American Chief Economist Mark Fleming. The housing market in the U.S. has benefited from global economic turmoil, according to Fleming, because the historically low mortgage rates are increasing affordability.

“The yield on the 10-year Treasury note hit record lows on the back of the ‘Brexit’ vote, uncertainty around the future of the European Union, and economic concerns in China,” Fleming said. “In the short term, the global economic turmoil is paradoxically having a positive impact on housing affordability and the health of the housing market in the form of almost historically low mortgage rates.”

“Improving affordability for consumers is a direct result of increased demand for long-term U.S. Treasury bonds due to overall uncertainty surrounding the future of global markets.”

Mark Fleming, Chief Economist, First American

May’s RHPI was unchanged over-the-month and up by 0.4 percent compared to May 2015; real house prices in May were nearly 40 percent below their peak set in July 2006 during the bubble and 19 percent below their January 2000 level. Fleming said unadjusted house prices are expected to increase by about 5 percent year-over-year in April. Meanwhile, the national price level (unadjusted is about 3 percent lower than its 2007 peak during the housing boom.

Fleming said contrary to conventional wisdom, housing is becoming more affordable in markets such as San Francisco, Washington, D.C., and Boston, where increases in house-buying power were sufficient to offset unadjusted price appreciation. Real house prices declined over-the-month in 15 of the 43 metros tracked by First American in May.

Inventory was down nearly 6 percent year-over-year in June down to 2.12 million existing homes for sale, according to the National Association of Realtors; while a lack of inventory is problematic, the combination of low mortgage rates and job growth are helping the market reach its potential for home sales, according to Fleming. A rise in median household income is also contributing to increased affordability.

“Rising household incomes and falling mortgage rates are currently boosting consumer house-buying power in many major metropolitan markets, offsetting any nominal gains in price levels,” Fleming said. “Improving affordability for consumers is a direct result of increased demand for long-term U.S. Treasury bonds due to overall uncertainty surrounding the future of global markets.”