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Monday, December 6, 2021

Bubble watch: California housing ‘affordability gap’ nears pre-crash level

The “bubble watch” searches for trends that may indicate further economic and/or housing market problems.

Discussion: California’s “home affordability gap” for first-time buyers is close to the levels seen in the bubble years of the mid-2000s.

Source: My trusty spreadsheet compared an affordability criterion for starter homes in California and the US — the California Association of Realtors’ first-time buyer index.

This less-than-traditional metric is more generous in terms of merit than most benchmarks. This assumes that a house hunter earns a median household income and is purchasing a residence worth 85% of the median sale price financed with 10% down. Payments, insurance and taxes equal 40% of household income.


The odd pandemic housing market made the home price tag higher for all.

The third quarter median sale price for an existing single-family home in California was $814,580—up 17% in 12 months versus $363,700 nationally—up 16% in a year.

But when it comes to what a home hunter really pays — the monthly payment — part year’s increased salaries and near-historically low mortgage rates eased some of that sale price pain.

Realtor economists found that 42% of Californians can meet some of the lenient homebuying eligibility standards 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 across the country. CAR’s math shows that 67% of Americans can afford to buy a starter home in the third quarter using the same math – up from 66% in the spring but down from 71% before the pandemic.

Consider the difference between state and national cost. A typical California first-time home hunter had 37% less potency than an American home hunter last summer. This spread could be a significant financial hurdle for people looking to at least consider housing deals in other states.


I’m generally not a big fan of the affordability index of how many people can actually afford to buy a house. Nevertheless, volatility in these indices can be worthwhile tools for looking at long-term trends.

Let’s start with the recovery from the housing debacle of the Great Recession – 2013-2019: an average of 51% of Californians can afford a starter home versus 73% nationwide. This is 31% less affordability in the state, which is a small difference with the nation compared to today.

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Next, look at the bubble-building period of 2000-07, when 43% of Californians could afford a starter home versus 70% nationwide. (Of course, consider the loose lending terms of this period. So just about anyone may be eligible to buy!)

Let’s humbly note that in that troubled 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 too far from 2021 levels.

So was California’s affordability ever relatively fine?

Think about what happened in 2008-2012, right before, during and immediately after the ugly housing crash: falling prices and low rates.

It increased California starter-home affordability by an average of 64% versus 78% nationally. Californians who dare to shop in those challenging times enjoy the market In college 18% less affordability than the nation.

how bubbly?

On a scale from zero bubbles (no bubbles here) to five bubbles (five-alarm alert)… Five bubbles!

I remember that power once mattered. If those concerns reappear, the widening cost gap should be worrying for California’s housing market.

Yes, this California-versus-US homebuying affordability gap was narrowed a bit by spring last summer. That is, 2hen the spread was at its greatest level since the fourth quarter of 2007.

Still, the buy-and-hold of the pandemic era, along with historically cheap money, sharply reduced your chances of owning a typical Californian.

And this shrinking affordability is even more troubling when mortgage rates are set to rise. A big reason is that inflation — a key factor in determining interest rates — is heating up.

Since 2000, US inflation 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 speaking, loans typically cost 2.8 percentage points more than these cost-price increases.

Yet in October, US inflation stood at 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.

Industry cheerleaders will be shouting that today’s overheated price tag is all about “simple supply and demand.” Well, demand means there are buyers who can actually buy.

Jonathan Lancer is a business columnist for Southern California Newsgroup. He can be contacted at [email protected]

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