Subscribe below to keep up with our latest updates

    Main Content

    South Bay Real Estate: Affordability Q1 2024

    May 16, 2024

    By: Richard Haynes

    Regular readers are likely aware of my anticipation for the release of the California Housing Affordability Index (HAI) by the California Association of Realtors every quarter.

    By now, you’ve probably grown accustomed to these quarterly affordability updates, and I hope you share my eagerness (or apprehension) to analyze the latest data.

    For those who might be unfamiliar, the HAI consistently proves to be one of the most reliable predictors of fluctuations in California’s housing market, shedding light on the number of potential homebuyers in the state.

    Generally, a higher HAI suggests an extended period of housing market growth in terms of pricing, while a decrease indicates a potential future slowdown in appreciation. Maintaining a balanced level of affordability is crucial for a healthy market.

    Before diving into the Q1 2024 HAI, which unfortunately is worse year-over-year, I’ll offer a summary of the Affordability Index’s forecasting prowess in the next section for those new to this topic or in need of a refresher.

    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, 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.

    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 understand how the Housing Affordability Index reflects the California housing market, let’s dive into the latest figures for Q1 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 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%
    • 2023 Q4 – 15%
    • ————————————————————————–
    • 2024 Q1 – 17%

    Over the past 13 quarters, spanning over three years, I’ve discussed the Housing Affordability Index number. As you can observe from the list above, it depicts a continuous decline in affordability, reaching concerning levels across California.

    My previous warning in the “flashing red” blog provided a year’s notice about the looming affordability crisis, and unfortunately, it appears that affordability hit unsustainable levels one year later, and has sustained for two years.

    Are these ultra-low levels now sustainable? Is this time different?

    The most recent release indicates a 17% decline compared in Q1 compared to 19% Q1 of last year, which is not comforting at all.
    While this quarter’s report is not nearly as damaging as the 15% levels reached last year (the lowest since the Great Recession), the set-up of rising interest rates into Q2 and continued record home prices is cause for major concern.

    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 7.3% compared to Q1 2023.
    • The minimum annual income required to afford a home increased to $208,400.
    • Monthly payments reached $5,210, based on a 6.86% 30-year mortgage rate.

    Statewide, median home prices saw an increase year-over-year which gives no relief to home buyers with 73% of the population priced out of the median home price.

    While monthly payments were expensive, they were lower than last quarter and interest rates were lower as well. That said, rates are currently surging in the second quarter of this year, and I expect those nose-bleed level payments and rates to return.

    The minimum annual income needed to purchase decreased, but again, expect that to rise into Q2 if interest rates and home price continue to rise.

    Other notable findings from the report include:

    • The Los Angeles Metro area is still notably less affordable compared to the entire Bay Area (15 vs. 20).
    • Nationally, U.S. affordability currently sits at 37%.
    • Affordability in Orange County remains at 11%, and L.A. is now at 14.

    While national housing affordability sits at a low of 37%, it is still far from the extreme lows seen before the housing bubble burst in 2007, when the entire country reached just 11% affordability.

    That said, California and its local counties continue to approach those concerning figures from 2007.

    Final Thoughts

    I hold the same position as my last reports.

    The market is not on the cusp of an imminent housing crash. Current statistical data in California and the South Bay support a solid market, and I see solid fundamentals anecdotally in my daily work.

    As always, I do not think a 17% affordability rate is sustainable in the very long term.

    Further, I believe affordability will get worse in the coming quarters with a resurgence in rising interest rates and prices staying stable to rising.

    Restated yet again, there are economic dynamics keeping this South Bay 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.

    We do need, however, lower interest rates, lower prices, or both to have a truly healthy market with greater affordability.

    For now, thanks to the three economic points above, 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.

    In 2024, affordability is off to a bad start and will likely get worse before it gets better.

    All we can hope for is lower rates and moderating prices to get to more balanced affordability for the good of the entire local home marketplace.

    Skip to content