Those who follow my updates know that each quarter, I eagerly await the release of the California Housing Affordability Index (HAI) from the California Association of Realtors.
This quarterly report has become a staple for many, and whether you’re excited or anxious, I’m sure you’re curious to see what the latest data reveals.
For those less familiar, the HAI is a powerful tool for predicting trends in California’s housing market, offering a glimpse into the pool of potential homebuyers across the state.
Typically, a higher HAI signals a longer stretch of price growth, while a drop in affordability hints at a potential slowdown. Striking the right balance in affordability is key to maintaining a healthy market.
As we delve into the Q2 2024 HAI—unfortunately showing further declines in affordability compared to last year—I’ll first provide a brief overview of the index’s track record for those new to this subject or in need of a quick 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.
History has shown that when more residents can afford homes in the state, more home prices move higher. Conversely, when fewer residents can afford homes in the state, prices plateau and even pullback.
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, 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 historically predicts California housing market moves, let’s dive into the latest figure for Q2 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%
• 2024 Q2 – 14%
Over the past 14 quarters, spanning over three years, I’ve discussed the Housing Affordability Index number every quarter. As you can observe from the list above, it depicts a continuous decline in affordability with this current print being the worst number of the bunch.
My previous warning in the “flashing red” blog provided a year’s notice about the looming affordability crisis, and unfortunately, it appears that affordability has continued its decline to horrible levels with only one other time in history being worse (preceding the Great Recession housing bubble).
How can these be sustainable? Is this time different?
The most recent release indicates a 14% number in Q2 compared to 16% in Q2 of last year, which is not comforting at all.
In fact, it was only worse in 2006 – 2007 when it ranged from 11% to 13% affordability with liar loans and false loan documents in full effect.
Let’s break down the HAI number further for more perspective.
Analyzing Q2 Data
Here are the key highlights from the latest HAI report:
- Median home prices rose by 9.0% compared to Q2 2023.
- The minimum annual income required to afford a home increased to $236,800.
- Monthly payments reached $5,920, based on a 7.10% 30-year mortgage rate.
Statewide, median home prices saw an increase year-over-year which gives no relief to home buyers with 86% of the population priced out of the median-priced home market.
Monthly payments jumped by a whopping $710 thanks to surging home prices and rising interest rates sequentially. But on a brighter note, recent developments in this current quarter (Q3 2024) are seeing interest rates fall with a Fed rate cut likely on the horizon, which hopefully makes this incredibly high payment come back down to earth sooner rather than later.
The minimum annual income needed to purchase jumped from $208,400 to today’s number of $236,800, which is so discouraging for buyers when it comes to buying just the median-priced home throughout the state.
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 (13 vs. 18).
- Nationally, U.S. affordability currently sits at 33%, worse than 36% last year.
- Affordability in Orange County remains the same at rock-bottom 11% affordability.
While national housing affordability sits at a low of 33%, 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 worsening affordability figures that approach 2006 – 2007 numbers.
Final Thoughts
I am in complete shock when it comes to the California Housing Affordability Index numbers.
Reaching 14% affordability in our great state, just a whisper from the levels preceding the Great Recession/Housing Bubble (11% – 13%) and lower than the 17% marker we see preceding other CA housing recessions, is nothing short of incredible.
Despite extreme unaffordability, the current statistical data in CA and the South Bay support a solid market that stable to increasing in value depending on the marketplace. I do see solid fundamentals anecdotally in my daily work with a handful of properties receiving multiple offers (including my latest listing in South Redondo and single-family homes in Torrance).
In no way do I think a 14% affordability rate is sustainable in the very long term, however, falling interest rates and a looming Fed rate cut should help boost affordability by a few percentage points over the next couple of quarters.
I am optimistic affordability can improve, but it needs to improve quickly and significantly.
Restated yet again from past HAI blog posts, there are economic dynamics keeping this South Bay housing market on solid footing:
- Historically low supply continues a home inventory squeeze.
- Homeowners with loads of equity and rock-bottom mortgage rates.
- 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 forces thanks to the three points above, however, an economic recession and forced sellers could change the market rather quickly.
In 2024, affordability was off to a bad start and as I predicted last month, it has only gotten worse. The good news is that Q3 (and hopefully Q4) should produce more positive affordability results thanks to a change in borrowing costs for the better.
All we can hope for is lower rates and moderating prices to achieve more balanced affordability for the good of the entire South Bay home market and beyond.
Richard Haynes
DRE: 01779425
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The Richard Haynes Real Estate ShowA leader in South Bay real estate for the better part of a decade, Richard thrives as an advisor to his clients with over $248 million in sales as a broker or investment principal at his boutique agency, Haynes. Richard is known for his keen local market insights which have been featured in the L.A. Times, The Street, and Forbes, along with his weekly South Bay real estate blog. [read more]