According to the Real House Price Index released by First American Financial, consumers are still in a strong position to purchase a home but are getting squeezed on just how much home they can afford.

Real house prices increased 0.6% between July and August, while real house prices increased 11.3% year over year. Consumer house-buying power, how much one can buy based on changes in income and interest rates, decreased 0.2% between July and August and declined 4.7% year over year.

First American Financial Chief Economist Mark Fleming noted, however, that average household income increased 3.2% since August 2017.

“Rising mortgage rates, which increased from 3.9% to 4.6% over the last year, reduced consumer house-buying power by nearly $30,000,” Fleming said.

However, he said the figure does not factor in the change in household income since last August.

“Wage growth translates into rising household incomes, which were 3.2% higher in August compared to a year ago. That growth in household income contributed $11,000 to consumer house-buying power, which helped mitigate the negative effects of rising mortgage rates,” Fleming said. “While rising mortgage rates reduced house-buying power by $30,000 over the last year, rising incomes increased consumer house-buying power by $11,000. The net effect? Overall consumer house-buying power fell by $19,000 in August compared with a year ago.”

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 4.50 MBS) gained +35 basis points (BPS) from last Friday's close which caused fixed mortgage rates to move slightly lower compared to the prior week..

Overview:  Overall, the week's economic data was strong but basically matched expectations and provided no real surprises.  A "dovish" ECB and concern over Brexit, Italy and Mid-Terms had plenty of money seeking bonds and cause a very slight improvement in rates.

GDP: We got our first look at the 3rd QTR GDP (will be revised several times) and it was basically inline with estimates (3.5% vs est of 3.3%). Estimates on Monday hovered in the 3.1 to 3.2 range and have been gradually moved upward by today to the 3.3 to 3.4 range. Consumer Spending was the major driver and that is encouraging. The next biggest driver was government spending. The only weak spot was a pull back in business investment.

Central Bank Palooza: The European Central Bank kept their main interest rate at 0.0% and their deposit rate at -0.4% which was widely expected. The unknown was what ECB President Draghi would say about Italy and the end of QE. During his press conference, he did not have any major "bombshells". He did say that they have not been purchasing Greek bonds and have been purchasing Italian bonds. He cited Brexit and Italy as key risk areas but that risks to growth in the EU were "broadly balanced".

Taking it to the House: Pending Home Sales were stronger than expected, rising 0.5% in September vs market expectations of a pullback of -0.1% and a nice improvement over August's pace of -1.9%. The good news is that inventory has shaken loose as active listings on the NAR MLS has increased. Weekly Mortgage Applications bounced back 4.9% led by a big jump of 10% in Refinance Applications. Purchase Applications moved upward by 2.0%. September New Home Sales were lighter than expected (553K vs est of 625K) plus, August revised lower below the 600K mark. The August FHFA Home Price Index showed a MOM gain of 0.3% which matched market expectations.

The Talking Fed: We got their Beige Book which is prepared two weeks in advance of the next FOMC policy meeting.
Tariffs and Labor Shortages were the two biggest concerns among banking and business leaders in the Fed's 12 districts. Here are some key takeaways from the release:
- The word "tariff" was used 51 times vs 41 times in the September release and 31 times in the July release
- All 12 districts said that the U.S. economy in their region is expanding at either a "modest" or "moderate pace"
- Firms offered signing bonuses, flexible hours and more vacation time in order to attract and retain workers." Most businesses also expected wage gains to remain “modest to moderate” over the coming six months
- Many firms very concerned over the ongoing trade dispute with China.

What to Watch Out For This Week: