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Update: Q4 California Housing Affordability Rises Again

If you are a regular reader, then you know that I have committed to reporting on the California Association of Realtors (C.A.R.’s) Housing Affordability Index every quarter.

In my opinion, there is no greater predictor of future prices throughout the state of California.

I’ve reported on the Housing Affordability Index (HAI) since the beginning of this weekly blog dating all the way back to 2015, but only recently have I committed to the quarterly report after seeing what looks to be a warning sign in the past 2021 Q2 report.

For reference, please look at that August 2021 post here: “California Housing Affordability Index Might Be Flashing Warning Signs

Below is the new C.A.R. Q4 number along with all of the results from 2021.

Fourth Quarter HAI Rises Again

The premise of my quarterly commitment was a Housing Affordability Index number sitting comfortably at 27 in the first quarter of 2021 and then seeing a profound drop to 23 in the second quarter.

As a refresher, C.A.R. takes the statewide median home price, current borrowing costs, and resident income levels to measure what percentage of the population can afford the median-priced home.

Here is a look at Q4’s release and all of the 2021 numbers:

  • Q1 – 27%
  • Q2 – 23%
  • Q3 – 24%
  • Q4 – 25%

The official C.A.R. numbers are as follows below:

  • Statewide median home price of $797,470
  • Minimum annual income needed to buy is $148,000
  • Based on monthly PITI payment of $3,700 at a 3.28% rate (20% down)
  • 25% of California households can buy the median-priced home

While home prices in the South Bay are surging in 2022, one must remember that this report is very much released as a lagging number. This report is on the final three months of 2021 and is released in the second half of February.

What is interesting to see is that while rates in the report are up from 3.07% in Q3 to 3.28% in Q4, that interest rate jump was offset thanks to seasonality in prices where Q3 median prices sat at $814,580 and in the most recent report prices are lower at $797,470.

More into the Numbers

If we dive deeper into the report and numbers…C.A.R. made commentary that a “solid increase” in the state’s median household income allowed for affordability to rise and offset rising house prices, not just a lower median price.

When it comes to Los Angeles Metro (city of L.A.) specific numbers, affordability remained the same as the previous quarter.

The county of Los Angeles saw a rise in affordability compared to last quarter as well.

Conclusion

While these numbers do not reflect the strain and stress felt by buyers in our local South Bay market, you can’t fight the math – Statewide housing affordability is sitting at sustainable levels.

That said, all real estate markets are local.

L.A. County is in the top echelon of most unaffordable counties, relative to income, in the entire state.

But again, it is the statewide number that matters most, and all things considered, 25 is still a reasonable number compared to 13 and 17, which is when California prices have historically corrected.

In my opinion, I believe we have a chance to see a big drop in affordability with the Q1 of 2022.

My reasoning is threefold:

  1. I expect the median price to jump sharply.
  2. Interest rates are trending to 3.5%, if not higher.
  3. Income increases could slow down after end of year raises.

The rise in C.A.R.’s Affordability Index is a GOOD THING…although it may not feel like it to local South Bay buyers.

Perhaps the South Bay is in a new normal of rising prices and lower affordability thanks to its lack of land to build more homes, its desirable proximity to the beach and economic centers, and its incredible public-school systems.

I do think, however, it is a good bet to see affordability fall to start 2022 with rising prices and interest rates.

If we head back down to a path of 23 or less in Q1, then it will be cause for concern.

If we hold the line at the current level of 25, then California might be in a healthy spot for equilibrium.

Let’s hope for the latter statewide, and of course, more homes for sale in the South Bay.

Cheers.

DRE: 01779425

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