“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: California’s “home affordability gap” for first-time buyers is nearing levels last seen in the bubble years of the mid-2000s.
Source: My trusty spreadsheet compared an affordability yardstick for starter homes in California and the U.S. — the California Association of Realtors’ first-time buyer index.
This less-than-traditional metric is more generous in qualification terms than most benchmarks. It assumes a house hunter earns the median household income and is buying a residence worth 85% of the median selling price, financed with 10% down. Payments, insurance and taxes equal 40% of household income.
The odd pandemic housing market made a home’s price tag higher for all.
The third quarter’s median selling price for a single-family existing home in California was $814,580 — up 17% in 12 months vs. $363,700 nationally — up 16% in a year.
But when it comes what a house hunter really pays — the monthly payment — the part year’s increased pay and near-historic low mortgage rates dulled some of that selling price pain.
Realtor economists found that 42% of Californians could meet the somewhat generous homebuying qualification standards of 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 seen nationwide. CAR’s math shows 67% of Americans could afford to buy a starter home in the third quarter using the same math — up from spring’s 66% but down from 71% before the pandemic.
Ponder the gap between state and national costs. A typical California first-time house hunter had 37% less affordability than a U.S. home seeker this past summer. That spread can be a critical financial hurdle for folks pondering less-onerous housing deals in other states.
I’m usually not a huge fan of affordability indexes as a measure of how many folks can actually buy a home. Yet the swings in these indexes can be worthwhile tools to see longer-term trends.
Let’s start with the recovery from the Great Recession’s housing debacle — 2013-2019: An average 51% of Californians could afford a starter home vs. 73% nationwide. That’s 31% less affordability in the state, a smaller gap with the nation than today.
Next, look at the bubble-building period of 2000-07 when 43% of Californians could afford a starter home vs. 70% nationwide. (Of course, consider the loose lending terms of this period. So just about anybody could qualify to buy!)
Let’s politely note that in that troublesome period for housing, a different kind of feeding frenzy set the stage for a horrific real estate flop. In 2000-07, California offered 40% less affordability than the nation — not very far from 2021 levels.
So was California affordability ever relatively OK?
Think about what happened in 2008-2012, just before, during and immediately after the ugly housing crash: slashed prices and low rates.
That boosted California starter-home affordability to average a lofty 64% vs. 78% nationally. Californians with the nerve to shop in those challenging times enjoyed a market with only 18% less affordability than the nation.
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FIVE BUBBLES!
I recall that affordability once seemed to matter. If those concerns reappear, the wide cost chasm should be worrisome for California’s housing market.
Yes, this past summer produced a slight narrowing of this California-vs.-U.S. homebuying affordability gap from the spring. That’s 2hen this spread was at its widest since 2007’s fourth quarter.
Still, the pandemic era’s buying binge — even with historically cheap money — sharply lowered the chance a typical Californian can become an owner.
And this shrinking affordability is even more troubling when mortgage rates seem destined to rise. One big reason is that inflation — an important factor in setting interest rates — is heating up.
Since 2000, U.S. inflation has averaged 2.2%, according to the Consumer Price Index, while rates on 30-year mortgages averaged 5%, according to Freddie Mac. So historically speaking, loans are usually priced 2.8 percentage points above these cost-of-living increases.
Yet in October, U.S. inflation was 6.2% while this benchmark for mortgage rates — kept artificially low with Federal Reserve help — averaged 3.1%. That’s 3.1 points BELOW the inflation rate.
Industry cheerleaders will shout that today’s overheated pricing is all about “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 reached at [email protected]