Why Are Rising Incomes Good for the Housing Market?

Mortgage rates are on the rise, with Freddie Mac reporting this past week that a 30-year, fixed-rate loan averaged 3.50 percent, up from 3.44 percent the previous week. Meanwhile, rates were 3.91 last year during this same time.

However, according to the Census Bureau, which released its annual report on Income and Poverty in the United States this past week, the median household income increased by 5.2 percent in 2015—the largest annual gain in income since the report was founded in 1967. According to Redfin.com, here’s why that’s good news for homeowners and homebuyers:

Income growth is a fundamental driver of buyer demand

Home prices have risen every month since March 2012, according to the Redfin Real-Time Market Tracker. Until now, however, there’s been little news to show that the broader economy supported these price increases.

The recent report suggests that the run-up in home prices and sales growth has legs and will persist into 2017, says Redfin chief economist Nela Richardson. “Income growth is a fundamental driver of buyer demand,” Richardson says. “Up until 2015, the housing recovery occurred without any upward movement in median household incomes.” In other words, historically low mortgage rates meant homebuyers could buy more home–or afford to pay more for the same-sized home.

The recent report demonstrates that the rebound in housing is not as dependent on mortgage rates anymore. Another driver of homebuyer demand, income growth, has returned. “That’s a strong signal of the persistence of the housing recovery,” Richardson says.

Mortgage rates remain favorable for borrowers

Mortgage rates are the highest they’ve been since June, but historically speaking, the rate still is extremely favorable for borrowers.

Even as the economy is recovering, it looks like rates will remain historically low for the foreseeable future. The consensus is that the economy’s still not strong enough to sustain a rate hike. Even just thinking about the possibility can have consequences: The S&P 500 recently dropped 2.5 percent, the largest drop since Brexit, based on investors’ speculation that rates might be raised.

Fed Governor Lael Brainard also has said she doesn’t think that a rate hike is warranted, and the CME Group (which has a FedWatch tool that actively projects the probability of a rate hike) showed a significant drop for a September hike. It’s now at a relatively low 12 percent. So, homebuyers should enjoy less expensive borrowing for at least the next few months.


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