There is a lot of shifting to cover each week in the blog thanks to rapidly changing home submarkets, mortgage rates, and sentiment around the economy.
It has not been since the Coronavirus stay-at-home orders where I truly feel like there has been so much to analyze amidst quite a bit of uncertainty. Summer 2020 until May 2022 was just a straight fervor of demand and appreciation in our South Bay real estate market.
While the May statistics do not suggest any slowing in our local South Bay home market, perception and confidence has certainly changed among agents and clients. See more on last week’s blog post for May market info: “Hot Topics: South Bay Home Market Shifting & Rising Mortgage Rates”
Before I get into this week’s post…it is still another week with another scratchy voice. I simply have not been able to record a clear podcast. Grrrrr.
A big thanks to all of you for your patience as many prefer to listen to these reports in their car, on walks, etc. I promise that there is a lot coming your way.
I hope to share very soon!
That all said, this week’s topic is/was an attempt to calculate C.A.R.’s Housing Affordability Index number in real time. With the surge in interest rates, this quarterly index (in my humble opinion) is a great forecaster of future prices and stability in the home marketplace. I really want to see how the numbers react with the surge of interest rates over just the past week or tow.
I may have gotten in over my skis trying to calculate the C.A.R. Housing Affordability Index because they use economic data that is likely paid for, and their calculations are opaque to keep others from ripping them off (like me – ha!).
The best I might be able to do is walk you through how numbers are calculated and my thoughts with educated guesses.
C.A.R.’s Assumptions and Methodology
The California Association of Realtors clearly states their assumptions and methodology for the calculation of the Housing Affordability Index. If you want their full breakdown, then you can see it here: https://www.car.org/marketdata/data/haimethodology/
Instead, I will do a summarized version below:
- Step 1 – Statewide median price for the quarter
- Step 2 – Assuming buyers can make a 20% down payment
- Step 3 – Utilizing the national average effective mortgage rate (fixed & adjustable) from the Federal Housing Finance Board
- Step 4 – The monthly PITI payment is calculated
- Mortgage payment from step 2 & 3
- Property taxes assumed at 1% of median price divided by 12
- Monthly insurance is 0.35% of median price divided by 12
- Step 5 – The monthly PITI can be no more than 30% of household income, thus the payment is divided by 0.3% to come up with the minimum qualifying income to own
- Step 6 – Distribution of California household income is obtained from Claritas
- Step 7 – The minimum income in step 5 is multiplied by 12 and then compared to the income distribution from Claritas to come up with how many Californians can afford the medium-priced home
There you have it! I am sure it is still confusing, but if you work through it, then the calculation is not that hard.
My Rough Calculations and Adjustments
This is where I ran into trouble thinking I could make calculations on a whim!
- Step 3: It turns out it is not clear what number C.A.R. uses from the Federal Housing Finance Board.
- Step 6: It turns out that Claritas does not give out their information for free.
I am not an economist or data scientist but conveniently the Federal Housing Finance Board looks to be dissolved into the Federal Housing Finance Agency and there have been changes in how rates are reported starting back in 2019.
That said, I learned that C.A.R. does not use 30-year fixed mortgage rates, but a blend of all rates in the mortgage market. So, while I have talked about the St. Louis FRED’s 30-year rates (which is currently at 5.78%), there could be a lower rate calculated for California.
On pure speculation, I believe C.A.R. is using the “MIRS Transition Index” which can be found here: https://www.fhfa.gov/DataTools/Downloads/Pages/Monthly-Interest-Rate-Data.aspx
If you notice, rates are going up slower than the FRED’s numbers and in May, they were sitting at a meager 3.84%.
I do not have a problem with this effective rate. As rates rise, buyers will get less conservative and go from 30-year rates to ARMs to keep their rate lower and improve affordability. So, if they blend various rate options, it will be a better reflection of the products buyers may choose in the market.
And finally, our South Bay jumbo buyers are landing rates sub 4%, and perhaps after the past week, are now creeping into the low 4’s on adjustable jumbo rates at the highest.
The long and the short, interest rates in the California Association of Realtors are having a far less impact on the Housing Affordability Index than I originally thought – due to the effective rate calculation.
In January the MIRS was at 2.97%, and in May, it only climbed to 3.84%. Interesting!
And, of course, I do not have access to the Claritas data. Do any of our readers have an account at work? Please share if so, and I think I can make the calculations next week!
In my best effort to not have this be a letdown, the Q1 Housing Affordability Index sat at 24%. For reference, see my old post titled, “Update: Q1 California Housing Affordability Drop to Start 2022.”
According to MIRS data, the effective rates were 2.97% (January), 3.09% (February), and 3.44% (March) during the quarter.
Today the MIRS rates are 3.68% (April) and 3.84% (May) and the median price home is essentially flat, only up about 1.6% from last month, and up about 6% from last quarter.
All in all, I do not think we are going to see a massive drop in affordability in the Q2 C.A.R. index because mortgage rates are not accelerating as quickly with the effective rate numbers from the MIRS statistics.
That does not mean we will not go lower than 24% affordability, but it might only be another one or two percentage points rather than a huge drop thanks to 30-year mortgage rates essentially doubling since the last report – rates are rising slower in the MIRS keeping the market “more affordable” in Q2.
Regardless, affordability going lower is still an important development even if it is a less significant drop.
Conclusion: More in the Coming Weeks
I am going to put a call into C.A.R. and see if they are willing to verify that they use the MIRS and if they are willing to share the Claritas data. If yes, I can calculate a real-time affordability number for you.
Also, as I stated before, if a kind reader has access to Claritas and is willing to share the income distribution numbers in the state of California, then that would be amazing! I would calculate ASAP next week.
Looking forward to sharing more info next week and if we are lucky, C.A.R. will share some insight with me that I can pass along in the next post!