Home Price Growth Rate Double Wage Growth Rate, Mortgage Rates on the Rise

The onslaught of continued low interest rates has fueled the housing market to higher levels. In addition, a recent shortage of skilled housing workers has added to the industry's stress as fewer homes have been built while lessening the supply of homes available for sale. Consequently, a growing demand for homes nationwide has propelled the growth rate in housing prices above the growth rate for wages. The concern is that home prices have been rising faster than wages, thus decreasing the affordability for families across the country. 

Should wages begin to grow at a faster rate than home prices, homes will become more affordable for buyers. Since the beginning of 2012, the House Price Index tracked by Freddie Mac, rose over 24% as of the third quarter of 2016. For the same period, the Wage Growth Index, compiled by the Bureau of Labor Statistics, grew just over 11%.

Optimism about economic growth has led to higher inflationary expectations, which eventually translates into higher interest rates. Over the past two months, the yield on the 10-year U.S. Treasury has increased from a historical low of 1.35% to 2.45% at the end of December. As a gauge for mortgage rates nationally, the increase in the 10-year Treasury has also led to an overall increase in mortgage rates. According to data made available by Freddie Mac, the average rate on a 30-year fixed mortgage loan increased from 3.44% in August to 4.32% at December's end. The concern economists have is that as mortgage rates continue to increase, home sales and affordability may begin to be hindered.
Sources: Freddie Mac, BLS, Bloomberg, U.S. Treasury