As my weekly readers are aware, I eagerly anticipate the release of the California Housing Affordability Index each quarter from C.A.R. (California Association of Realtors).
For those unfamiliar, the HAI number has consistently proven to be one of the most accurate forecasting metrics for California’s housing market fluctuations, providing insights into the number of buyers able to afford homes in our state.
In general, a higher number of people able to afford homes suggests a longer runway for housing market growth in terms of pricing.
Conversely, a decrease in affordability may indicate a slowdown in price appreciation.
A balanced level of affordability is essential for a healthy market.
Before delving into the latest Q4 2023 HAI number, which unfortunately presents the continuation of a tough trend, below I will provide a summary for those who may be new to this topic or require a refresher.
Understanding the C.A.R. Affordability Index
This section is 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.
What history has shown is that when more residents can afford a home, the more home prices can move higher. Conversely, the fewer the residents that can afford homes in the state, which can indicate 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.
A little over two years 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.
Worst Affordability Since the Great Recession
Now that you are familiar with how the Housing Affordability Index number tracks the California housing market, let’s finally get to the most recent Q4 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 number in their historical Excel sheet (both were moved 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%
• 2023 Q3 – 15%
• 2024 Q4 – 15%
I have now covered the Housing Affordability Index number for the past 12 quarters (a full three years!), and you can see how the list above shows the march down to truly terrible affordability throughout the state of California.
My “flashing red” blog gave a year heads-up on the potential affordability crisis, and it now seems that the challenging affordability continues to only get worse.
The latest number released, confirming 15% in sequential quarters, is still concerning.
Let me give you some perspective on why the current number is such an issue…
The last time the affordability number was lower than 15% was back in Q3 of 2007 when the index hit 11% – the absolute peak of the market before the 2007 housing bubble burst and sent the entire U.S. economy into what is now known as the Great Recession.
All other California real estate recessions occurred when the HAI number reached the high teens, and we are now below all those numbers.
Now I am not a doomsayer, but the current affordability index number is quite scary when compared to history.
Let’s break down the HAI number further.
Analyzing the Q4 Data
Here are the key highlights from the latest HAI report:
- Median home prices rose by 5.9% compared to Q4 2022.
- The minimum annual income required to afford a home increased to $222,800.
- Monthly payments reached $5,570, based on a 7.39% 30-year mortgage rate.
Statewide, median home prices saw a solid increase of 5.9%, showing stronger growth compared to the previous quarterly report’s 2.2%.
Despite the rise in prices and monthly payments, overall affordability remained steady.
The minimum annual income needed to purchase a median-priced home saw only a slight uptick (less than $2,000), indicating a potential deceleration from increases, though declines would be preferable.
What’s more, the effective composite interest rate reached its highest level in nearly two decades, marking only the second time it has surpassed the 7% mark.
Other notable findings from the report include:
- The Los Angeles Metro area is notably less affordable compared to the entire Bay Area (14 vs. 19).
- Nationally, U.S. affordability increased slightly to 35%.
- Affordability in Orange and Los Angeles Counties remains equal at 11%.
While national housing affordability sits at a low of 35%, it is still far from the extreme lows seen before the housing bubble burst in 2007, when the entire country reached just 11% affordability; however, California and its local counties continue to get closer to those concerning figures from 2007.
Final Thoughts
As mentioned in my conclusion in last quarter’s report…
A 15% affordability number in the state, as well as 11% affordability in Orange and Los Angeles counties, is not a recipe for a steady and sustainable housing market.
We are not on the cusp of a housing crash, but affordability needs to get better for the long-term health of markets.
There are economic dynamics keeping this housing market on solid footing:
- Historically low supply creating an inventory squeeze.
- Homeowners with loads of equity and rock-bottom mortgage rates.
- Essentially no forced sellers.
Thanks to the above three points, our housing market can tolerate a lot of pressure. But if supply rises or distressed sellers come to the market, then things can shift quickly.
With inflation coming down, albeit slowly, there may be fewer rate cuts that what people expect from the Federal Reserve. This could keep rates higher for longer, which, in turn, may keep affordability challenging for the remainder of the year if there is no price relief.
If falling rates fail to materialize, then look out.
In 2024, it looks like rough affordability is here to stay…at least until The Fed changes its tune.
I’ll see you in three months for the next report.