U.S. Wage Growth Eclipses Mortgage Rate for First Time Since 1972

U.S. Wage Growth Eclipses Mortgage Rate for First Time Since 1972

(Bloomberg) — The U.S. economy reached an important milestone in October that ought to put it on a more sustainable footing going forward: wage growth eclipsed mortgage rates for the first time since 1972.

Average hourly earnings for production and nonsupervisory employees — who comprise more than 80% of the U.S. private-sector workforce — rose 3.8% from a year earlier in October, according to Labor Department data published Friday. The average 30-year fixed mortgage rate in the U.S. in October was about 3.7%, according to Freddie Mac data. A year ago, before the Fed began easing, mortgage rates were closer to 4.9%.

If those trends continue, the combination will limit the debt burden for American households by keeping the share of would-be homebuyers’ wages being spent on interest payments under control. The Federal Reserve’s three rate cuts this year — undertaken for other reasons — have allowed wage growth to finally catch up as the job market continues to improve.

U.S. household leverage rose from about 75% in 1983 to 160% in 2008, a trend that was finally arrested by the collapse of the housing bubble and ensuing financial crisis, according to calculations by economists J.W. Mason and Arjun Jayadev. The primary cause of the increase in household debt relative to income over that 25-year period was Fed policy, which throughout kept interest rates well above the rate at which wages were growing, Mason and Jayadev said in a 2015 paper.

“The nominal interest rate has been higher than wage growth for a long time,” said Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center. “If this is to be sustained it would be a positive development in setting the bottom 50 or 60% of the population on a sustainable footing.”

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Source : Bloomberg Link

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