Guest Column: California’s Housing Affordability Crisis – The Issue That Never Went Away

Published December 9, 2014

By Leslie Appleton-Young

As 2014 draws to a close, there is concern brewing about the strength and vitality of the California housing market.

Once the sector that led the rest of the economy out of the Recession, sales of existing single-family homes are expected to be down by at least 8 percent this year compared to 2013. With mortgage rates remaining well below expectations this year, the market should be stronger. But it’s not. There are a variety of speed bumps slowing down market activity, with the biggest one being  housing affordability. There is little doubt that at a very fundamental level, housing affordability is a critical measure of housing well-being in the State.

The Housing Affordability Index (HAI)1 for California was 30 percent in the third quarter of 2014, down from 32 percent a year earlier. California’s housing affordability, as calculated by the California Association of Realtors (C.A.R.), measures the percent of households that can afford to purchase a median-priced home at a 20 percent down payment, the going interest rate and the distribution of income. Homebuyers needed to earn a minimum annual income of $94,960 to qualify for the purchase of a $467,700 statewide median-priced, existing single-family home in the third quarter of 2014. The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $2,370, assuming a 20 percent down payment and an effective composite interest rate of 4.23 percent. The effective composite interest rate was 4.36 percent in the third quarter of 2013.

Housing affordability in California has been declining since the most recent peak in the first quarter of 2012, when affordability measured 56 percent. Over the last decade and a half, the HAI averaged about 32 percent. Nevertheless, the affordability dropped significantly during the housing boom, and reached the bottom in the third quarter of 2007 when only 11 percent of households could qualify for a median-priced home. At the time, median-priced homes hovered at almost $600,000. The financial crisis and a dramatic drop in home values brought affordability to the highest level since C.A.R. started tracking the index in 1984. Between 2009 and the beginning of 2012, housing affordability in California hovered around 55 percent. It was a “once in a generation” buying opportunity that attracted many buyers into the market and created a fiercely competitive environment.

As a result of this "fire sale," the inventory of homes for sale was quickly absorbed and home prices started increasing rapidly. In August 2014, the statewide median price for existing single-family homes was 96 percent from the cyclical bottom.  The median price had increased by double-digits on a year-over-year basis for 23 consecutive months, before its growth rate started showing some moderation in June 2014.  Another impediment to housing affordability arose when the Federal Reserve announced its plan to start tapering the bond buying program in the summer of 2013. The announcement led to a 100-basis-point increase in mortgage interest rates. With the rise in home prices and higher interest rates, housing affordability has fallen again to its 30 percent long-run average.  It’s no surprise that C.A.R.’s annual Market Survey found that this year only 30 percent of the buyers were first-time buyers. This is the group that is the most heavily impacted.

Housing affordability constraints are not new to the California housing market. In fact, C.A.R. had raised the same issue in the 1980s and in the 1990s.  The following paragraph is an excerpt from the introduction section of the report “The Endangered American Dream: California Housing Crisis,” published in 1999:

"California has entertained the new millennium with a housing crisis in the making. Not since the late 1980s, when housing affordability hit “rock bottom,” has the state been on the precipice of a housing affordability catastrophe. Numerous forces, including soaring housing prices and rents that are both increasing much faster than incomes, are already having an adverse impact on the ecology of the housing market. Unless all of the stakeholders in California’s future can mobilize to create and implement a multi-faced strategy to address this situation, the golden glow of the California economy will begin to fade."

Leslie Appleton-Young, Vice President and Chief Economist for the California Association of Realtors, is a member of the Controller's Council of Economic Advisors. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Controller or his office.

1C.A.R. began producing its Housing Affordability Index (HAI) in 1984. The assumptions and methodology used to calculate C.A.R.'s traditional housing affordability index (HAI) can be found here: http://www.car.org/marketdata/data/haimethodology/


Table 3: California Housing Market Forecast

2011

2012

2013

2014 P

2015 F

SFH Resales (000s)

422.6

439.8

413.3

380.5

402.5

% Change

1.4%

4.1%

-5.8%

-8.2%

5.8%

Median Price ($000s)

$286.0

$319.3

$407.2

$455.0

$478.7

% Change

-6.2%

11.6%

27.5%

11.8%

5.2%

Housing Affordability Index

53%

51%

36%

30%

27%

30-Yr FRM

4.5%

3.7%

4.0%

4.3%

4.5%

Source: California Association of Realtors

Figure 3: California Sales Have Plateaued – Market is Underperforming

California, October 2014 Sales: 396,220 Units, -8.8% YTD, -1.9% YTY

California Sales Have Plateaued – Market is Underperforming

Sales are seasonally adjusted and annualized

Source: California Association of Realtors

Figure 4: California Median Price Gains Slowing

California, Oct. 2014: $450,620, Up 5.4% YTY

California Median Price Gains Slowing

Source: California Association of Realtors

Figure 5: Upward March of California Prices Will Slow

1970-2014

Upward March of California Prices Will Slow

Source: California Association of Realtors

Figure 6: Housing Affordability Down Sharply Since Q1 2012

California vs. U.S. – 1984-2014

% of Households That Can Buy a Median-Priced Home

Housing Affordability Down Sharply Since Q1 2012

Source: California Association of Realtors

Figure 7: Share of First-Time Buyers Remains Below Long-Run Average

Share of First-Time Buyers Remains Below Long-Run Average

Source: California Association of Realtors

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