California Housing Affordability Index Second Lowest Reading in 15 Years

The California Association of Realtors last week released their Q4 Housing Affordability Index numbers.

It was another quiet release as the numbers represent a big negative for California housing prices.

As many readers know, I have committed to covering C.A.R.’s Housing Affordability Index results each quarter because of its unique calculations that help forecast where California home prices may go.

Thanks to quickly growing prices and surging interest rates, California homes have seen affordability drop precipitously over the past 12 months.

While there are plenty of factors used to determine the health or general direction of the real estate market – for instance, median prices, sales, inventory, or pending sales, the HAI can help tune out the noise to simply see how many buyers are left to fuel prices higher, or conversely, when there is a stable of buyers, that could step in during a market decline.

The Q4 numbers are significant because they not only demonstrate how unaffordable housing is in California presently, but historically how ultra-low affordability is not sustainable.

In my opinion, the only panacea to this record unaffordability is falling interest rates or declining prices – or maybe a little bit of both.

Understanding the C.A.R. Affordability Index

This section is a copy/paste from my last blog post for new readers or to refresh the memory of current readers…

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 when more residents that can afford a home, the more home prices can move higher. Conversely, the fewer the residents that can afford homes in the state, that 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, affordability in the state averaged 50% and went as high as 56% affordability. Looking back 10 years, that 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 18 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.

Now a year ago, we saw the 2021 Q4 affordability number tick up to 25%. Today’s Q4 number is significantly lower.

Scary Q4 Affordability Number

Now knowing the background of the Housing Affordability Index number, let’s finally get to the latest release form the California Association of Realtors.

• 2021 Q1 – 27%
• 2021 Q2 – 23% (my “might be flashing red” blog)
• 2021 Q3 – 24%
• 2021 Q4 – 25%
• 2022 Q1 – 24%
• 2022 Q2 – 16% (warning is officially here)

• 2022 Q3 – 18% (concerning, if doesn’t rise)
• 2022 Q4 – 17% (historically not sustainable)

Not only did affordability in Q2 drop to its lowest level in nearly 15 years (to Q4 of 2007), but the most recent 4^th quarter number is essentially the second lowest reading in that decade and a half time frame.

Homes are not getting close to being affordable and historically it is not sustainable in the state of California.

Breaking Down the Numbers

I want to explore the numbers in greater detail so you can see the significance of market moves, along with the effect of rates and price.

First and foremost, prices are LOWER in Q4 of 2022 vs. Q4 of 2021 ever so slightly with a drop of 0.9% (or $7,470 lower).

That said affordability a year ago stood at 25% of households able to afford a home, whereas today it is only 17% – that 700 basis point drop in affordability is purely due to surging interest rates.

Californians needed to make $201,200 to afford a median priced home, whereas a year ago they could afford essentially that exact same home making just $148,000.

Lastly, the monthly payment has gone from $3,710 per month to a whopping $5,030 per month payment.

The shifts are massive in just 12 months’ time…

• Prices are basically constant but trending lower.
• Buyers need to earn 33% more to purchase.
• Payments have jumped by almost 36%.

Let’s explore some further numbers:

• Los Angeles County is at just 13% affordability.
• Ten years ago, payments on CA homes were just $1,410 per month.
• Nationwide, U.S. affordability stands at 38%.

Los Angeles County is now more unaffordable than the Bay Area (13% vs. 20%), albeit Bay Area home prices are still higher. What’s more, Orange County is now on par with Los Angeles County affordability where it is almost always more unaffordable than our local area (again, OC prices are still higher).

Conclusion / Final Thoughts

Last quarter’s report in Q3 was surprising to see affordability tick-up, however, this Q4 report brough few surprises.

Affordability is back to falling lower thanks to sky-high interest rates.

Even with home prices slipping, the market cannot escape the massive effect expensive mortgages – and that is likely starting to weigh on the market.

If a mere 17% of the California population can afford the median priced home that is far from a healthy market historically. The longer we stay at below 20% affordability, the more the market risks an unpleasant pullback – unless we are saved by falling borrowing rates.

Something must give…rates or prices.

The main reason for expensive housing prices holding strong is due to lack of supply.

Thanks to a vast majority of California homeowners owning lower than a 3.5% mortgage rate or a debt-free home, supply is tightly contracted. In January, the California Regional MLS had its lowest homes for sale reading ever.

With insanely low supply, it is hard for the market to adjust on prices.

If supply dynamics begin to change and more sellers come to market, then that is likely when we’ll see price weakness.

For now, home affordability is horrible in California and historically it is unsustainable.

Unfortunately for buyers, until supply changes, unaffordable California homes are here to stay.

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