California housing affordability gap near pre-crash levels – Orange County Register

“Bubble Watch” explores trends that may indicate upcoming economic and / or housing market problems.

Buzz: California’s “home affordability gap” for first-time homebuyers is approaching levels last seen in the bubble years of the mid-2000s.

Source: My trusty spreadsheet compared an affordability benchmark for startup homes in California and the United States – the California Association of Realtors First-Time Buyer Index.

This less-than-traditional measure is more generous in terms of qualification than most benchmarks. It assumes that a property hunter earns the median household income and purchases a residence worth 85% of the median sale price, funded with 10% down payment. Payments, insurance and taxes account for 40% of household income.

The trend

The strange pandemic housing market has raised the price of a home for everyone.

In the third quarter, the median selling price of an existing single-family home in California was $ 814,580, up 17% in 12 months from $ 363,700 nationally, up 16% in one year.

But when it comes to what a house hunter really pays – the monthly payment – the increase in wages for part of the year and the near historic low mortgage rates have blunted some of the price pain. of sale.

Real estate economists found that 42% of Californians could meet the somewhat generous qualifying standards for buying a home on this index. That’s up from 40% in the spring, but down from 48% in the pre-pandemic fourth quarter of 2019.

Similar trends were observed nationally. CAR calculations show that 67% of Americans could afford to buy a starting home in the third quarter using the same calculations – up from 66% in the spring but up from 71% before the pandemic.

Think about the gap between state and national costs. Last summer, a typical first-time Californian house hunter had 37% less affordability than an American house hunter. This gap can be a critical financial hurdle for people considering cheaper housing deals in other states.

Dissection

I’m not usually a big fan of affordability indices as a measure of how many people can actually buy a home. Still, fluctuations in these indices can be useful tools for seeing longer-term trends.

Let’s start with the recovery from the real estate debacle of the Great Recession – 2013-2019: On average, 51% of Californians could afford a first home compared to 73% nationally. That’s 31% less affordability in the state, a smaller gap with the nation than today.

Then look at the bubble-forming period from 2000 to 2007 when 43% of Californians could afford a first home versus 70% nationally. (Of course, take into account the flexible loan terms of this period. So just about anyone could qualify to buy!)

Let us politely note that in these difficult times for housing, another type of binge eating has paved the way for a horrible real estate flop. In 2000-07, California offered 40% less affordability than the nation – not far from 2021 levels.

So, has California affordability ever been relatively acceptable?

Think about what happened in 2008-2012, just before, during and just after the terrible real estate crash: slashed prices and low rates.

This boosted the affordability of startup homes in California to an average high of 64% versus 78% nationally. Californians who had the nerve to shop in these tough times were taking advantage of a market with alone 18% less affordable than the nation.

How sparkling?

On a scale of zero bubble (no bubble here) to five bubbles (five alarm alert) … FIVE BUBBLES!

I remember affordability once seemed to matter. If these concerns reappear, the vast cost chasm should be worrisome for the California real estate market.

Yes, last summer produced a slight narrowing of that affordability gap between California and the United States starting in the spring. That was when this gap was at its widest since the fourth quarter of 2007.

Yet the pandemic-era buying frenzy – even with historically cheap money – has dramatically reduced the chances that a typical Californian could become a homeowner.

And this reduced affordability is even more troubling when mortgage rates appear destined to rise. One of the main reasons is that inflation, an important factor in setting interest rates, is increasing.

Since 2000, inflation in the United States has averaged 2.2%, according to the Consumer Price Index, while rates on 30-year mortgages have averaged 5%, according to Freddie Mac . So historically, loans are typically valued at 2.8 percentage points above these cost of living increases.

Yet in October, US inflation was 6.2% while this benchmark for mortgage rates – kept artificially low with help from the Federal Reserve – averaged 3.1%. This is 3.1 points BELOW the inflation rate.

Cheerleaders in the industry will scream that today’s overheated prices are a matter of “simple supply and demand.” Well, demand means having buyers who can actually afford to buy.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at [email protected]


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