Every quarter I eagerly await the ever-important California Housing Affordability Index number released from C.A.R. (California Association of Realtors).
If you are a real estate numbers nerd like me, then I hope you are as excited to study the numbers.
Many of my weekly readers know that the HAI number has been one of the best predictors of real estate booms and corrections thanks to its measurement of how many buyers can afford homes in our great state.
The more people that can afford homes, the more runway the housing market may have to grow higher in price.
The fewer people that can afford homes, the more likely price appreciation may be running out of steam.
For a healthy market, I want to see balanced affordability.
Before I get to the Q2 2023 HAI number, which is a concerning number this time around, I want to share my summary in the next section for those not up to speed or reading for the first time.
Understanding the C.A.R. Affordability Index
This section is a copy/paste from my previous blogs:
C.A.R.’s Housing Affordability Index is an important metric as it aims to figure how many statewide households can afford the typical home in California.
The index considers the current median-price of existing homes in California, and assuming a buyer has 20% down, it calculates the overhead (mortgage, taxes, and insurance) to own that home and how many CA residents can afford that home based on income data.
So, a HAI number of 50 means 50% of the population can afford the median-priced home under current conditions.
A HAI number of 35 would mean 35% of the population can afford a home, a number of 64 would mean 64% of the population, and so on and so forth.
History has shown that when more residents can afford a home, more home prices can move higher. Conversely, the fewer residents that can afford homes in the state indicates times of plateau and even a pullback in prices.
For example, past California housing corrections have occurred right around 17% affordability. Right before the Great Recession in 2005, affordability hit 17% (like other CA peaks) and dropped to as low as 11% in 2007 (the lowest number ever) thanks to liar loans that fueled a real estate bubble.
On the flip side, in 2010 – 2012 when the CA market bottomed out, affordability in the state averaged 50% and went as high as 56% affordability. Looking back 10 years, which proved to be a time with the greatest upside and the HAI number gave clues to the future.
In a nutshell, history within the C.A.R.’s Housing Affordability Index has suggested:
• Buy confidently when the index hits the 30s (buy with both hands in the 40s & 50s).
• Sell when the index hits the high teens (bubbles occur in the low teens).
For the past nine years, the index has been range-bound between 23 and 36.
Just 21 months ago, I wrote a blog post about the Housing Affordability Index “Might Be Flashing Warning Signs” when the index hit 23 in the Q2 of 2021.
Still Concern Q3 Affordability Number
Now that you know how the Housing Affordability Index number historically tracks the California housing market, let’s get to the most recent number from the California Association of Realtors.
I want to note that I changed the 2023 Q1 number and 2022 Q2 number as C.A.R. looks to have revised those numbers in their historical Excel sheet (both were edited by one percentage point).
• 2021 Q1 – 27%
• 2021 Q2 – 23% (my “might be flashing red” blog)
• 2021 Q3 – 24%
• 2021 Q4 – 25%
• 2022 Q1 – 24%
• 2022 Q2 – 17% (warning is officially here)
• 2022 Q3 – 18% (concerning, if doesn’t rise)
• 2022 Q4 – 17% (historically not sustainable)
• 2023 Q1 – 19%
• 2023 Q2 – 16%
I have now covered the HAI number for the past 10 quarters, and you can see the shift if you split those quarters right in half.
My “flashing red” blog gave a year heads-up on the potential affordability crisis, and it looks like the challenging affordability is here to stay and could potentially get worse.
The latest number is a massive concern at 16%.
If you read press releases quietly released on a Friday (8/11), the California Association of Realtors dubs it as the lowest level in nearly 16 years.
I don’t think that quite illustrates the concern around this number.
The last time the number was lower was an 11% affordability number in Q3 of 2007 – the absolute peak of the market before the 2007 housing bubble popped and sent the entire country into a Great Recession.
Now I am not an alarmist and the dynamics this time around are a lot different, but the lowest level in nearly 16 years” should really state it is “lowest level since the peak of the housing bubble nearly 16 years ago.”
Let’s look deeper.
Breaking Down the Numbers
There are three main take-a-ways from the latest HAI report.
1. Median priced homes DECREASED by 5.3% to $830,620.
2. The minimum yearly income to afford a home grew to $208,000.
3. Monthly payments were at $5,200 per month with a 6.61% 30-year mortgage.
Firstly, despite statewide median house prices falling from $877,140 in Q2/22 to $830,620 in Q2/2023, the number of households that could afford a home still dropped from 17% to 16%.
That is the power of rising interest rates evaporating buying power. The effective composite rate a year ago was 5.39% and in Q1 of 2023 it stood at 6.48%. It is likely higher now with interest rates near 20-year highs and expected to remain elevated through the end of this year.
The minimum yearly income required to buy a median priced home climbed by a little over $10,000 to $208,000. While many workers at this income level likely received a cost-of-living increases to keep pace with inflation, it is still quite astonishing that buyers need to make over $200k to afford an $830,000 home.
In Manhattan Beach, the median price buyer in that city would need to be making over $600,000 a year or more.
And finally, monthly payments at $5,200 per month are now 268% higher than they were at the affordability peak in Q1 of 2012 when just $1,410 per month was needed to afford a median priced home. Wowzers.
More interesting facts from the report:
• Los Angeles County is still less affordable than all of the Bay Area.
• Nationwide, the U.S. affordability rate sits at 36%, lower both sequentially and year-over-year.
• Orange County affordability was flat, staying at 12% – incredibly low.
Los Angeles County continues to lack affordability at just 15% of households able to afford a median priced home. Orange County is even worse.
And while the nation U.S. housing affordability is low at 36%, it is still not close to its most unaffordable when the entire country got to 11% affordability before the bubble burst. California seems to be feeling the squeeze even more than the entire country.
This 16% affordability number in California is a concerning stat.
If one studies C.A.R.’s HAI history, you will see that the past low affordability numbers do not end up great for the California housing market. It is hard not to stop and really respect this new number.
With Q1 and Q2 2023 South Bay median home prices declining in many neighborhoods…and now this ugly affordability number, it is more statistical evidence that everyone in the home market throughout the South Bay, and statewide, should proceed with caution.
And while our local market is resilient, it is truly the historical lack of homes for sale (low supply) that is buoying prices.
If supply were to increase with all other things staying equal, then look out.
The only way to safely turnaround affordability would be a drop in mortgage interest rates. That would help buyers with affordability and likely continue to grow prices with little risk.
Without a decrease in interest rates, either 1) affordability gets worse, possibly fueling a too hot market, or 2) pricing needs to continue falling to put the market into some sort of affordability equilibrium.
All in all, I am not a doomsday real estate prognosticator. Far from it actually.
I have felt confident around our home markets (where normally I am conservative or bearish) and I still do see stability – there are no signs of major cracks based on our view of the Beach Cities and the Palos Verdes Peninsula.
But it would be foolish of me not to respect this number.
The 2023 Q1 and Q2 South Bay median home prices are down. Affordability is at its lowest since the 2007 bubble burst and there seems to be no drop in interest rates coming anytime soon.
We are sitting in amazingly interesting times.
Will the affordability number forecast a near-term drop in prices like it has over the decades?
Or will a lack of supply, thanks to property owner’s golden handcuffs, along with the massive buying demographics of the Millennial generation continue to support higher prices?
I hope the next couple of quarters can help answer those questions.