If you’ve been following my updates, you know I eagerly anticipate the California Housing Affordability Index (HAI) report from the California Association of Realtors each quarter.
These reports have become a cornerstone for anyone tracking the housing market, sparking curiosity, excitement or concern depending on the trends they reveal.
For those unfamiliar, the HAI is a critical tool for analyzing California’s housing market, shedding light on the pool of potential homebuyers across the state.
A higher HAI generally signals prolonged price growth, while a decline often points to a potential market slowdown. Striking the right balance in affordability is crucial to sustaining a healthy market.
As we dive into the Q3 2024 HAI—which, unfortunately, reflects further declines in affordability compared to last year—I’ll start with a quick overview of the Index’s history for anyone needing a refresher or new to this topic.
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.
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, 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.
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.
Affordability Eases Thanks to Interest Rates
Now that you understand how the Housing Affordability Index reflects the California housing market, let’s dive into the latest figure for Q3 2024 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 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%
• 2023 Q4 – 15%
• ————————————————————————–
• 2024 Q1 – 17%
• 2024 Q2 – 14%
• 2024 Q3 – 16%
Over the past 15 quarters—spanning more than three years—I’ve closely analyzed the Housing Affordability Index (HAI) every quarter. As seen in the trend outlined above, affordability has steadily declined, with Q2 marking one of the lowest points ever recorded. However, the current Q3 report shows a modest rebound, largely driven by interest rates hitting their lowest levels of 2024.
In my earlier “Flashing Red” blog, I warned of an impending affordability crisis, and unfortunately, that warning has proven accurate. While the latest report shows a 16% HAI— sequential and year-over-year improvement—it’s important to view this progress with caution. Although improvement in affordability is comforting, unfortunately the positive effects from low interest rates may be short lived due to current rate spiking.
To provide a deeper understanding of these trends, let’s break down the Q3 HAI numbers and explore what they mean for California’s housing market.
Analyzing the Q3 Data
Here are the key updates from the latest HAI report:
1. Median home prices rose by 4.3% compared to Q3 2023.
2. The minimum annual income required to afford a home is $220,800.
3. Monthly payments reached $5,520, based on a 6.63% 30-year mortgage rate.
Statewide, median home prices saw an increase year-over-year of 4.3% which is lower growth than in the past, however, any price growth at this point really puts a strain on affordability.
Monthly payments dropped sequentially by $400—that’s the interest rate effect. Those low, low rates in August and September eased monthly payments in a big way, and as a result, we got a nice reprieve of 16% affordability. Unfortunately, as already stated above, rates are climbing back to old highs, which does not bode well for next quarter.
The minimum annual income needed to purchase a median price home also fell sequentially from $236,800 to $220,800. But again, this is a short-term boost from fleeting interest rate lows.
Other notable findings from the report include:
• The Los Angeles Metro (and LA County) area is still notably less affordable compared to the entire Bay Area (15 vs. 21).
• Nationally, U.S. affordability currently sits at 35%, slightly better than 34% last year.
• Affordability in Orange County remains at a horrible 12% affordability.
Los Angeles Metro continues to be much more unaffordable than the Bay Area, and Orange County’s lack of affordability continues to sit at truly horrendous levels.
National housing affordability is significantly better than California and far from its 11% low before the Great Recession, a good sign for the rest of the country and likely CA’s issues not driven by irresponsible lending practices of the late 2000s.
Conclusion
This quarter’s 16% affordability report brings desperately needed relief from the shocking 14% number last quarter.
And while the relief is welcomed, I believe it will only serve as a short-term respite as interest rates are marching higher again.
If rates continue their march higher, then expect affordability to drop back to devastating low numbers next quarter, which is just not healthy for our markets in the long term.
On the flip side of my negativity around affordability, the local South Bay market fundamentals remain on solid footing. Thanks to low home inventory and sticky supply-side issues, home prices are flat to slightly increasing for the most part (read my Q3 report from last month for reference).
I am optimistic affordability can improve over time as interest rates hopefully subside to a lower range, but we do need significant improvement – both from falling interest rates and prices staying in check.
Restated yet again from past HAI blog posts, there are economic dynamics keeping this South Bay housing market on solid footing:
1. Historically low supply which continue a home inventory squeeze.
2. Homeowners with loads of equity and rock-bottom mortgage rates.
3. Basically, zero forced sellers.
We desperately need lower interest rates, lower prices, or both to have a truly healthy market with greater affordability.
Our local South Bay home marketplace has room to weather negative changes thanks to the three points above, however, an economic recession and forced sellers could change the market rather quickly.
Affordability is better in Q3, but I fear it will not last for long. The hope in 2025 should be for falling interest rates, rapidly rising income, and flat housing prices. That is at least my magic recipe to solve housing affordability for the health of our markets for years to come.
I’ll see you in three months for the next HAI report!