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2014: issue 10
Why California Is In The Middle Of Another Housing Crisis Affordability and mortgage lending issues abound Editor’s note: The saying “so goes California, so goes the rest of the country” may apply in this instance. Read an insight from the CEO of the Realtor’s Association in California to get a preview of what may come to the rest of us. His warnings have long range implications. Decades from now, when history writes the story of the Millennials, they may well be remembered as the first generation for whom using smartphones and social media was as natural as taking a breath. Yet unless things change, there’s a good possibility they’ll also be known as the generation that couldn’t afford to buy or rent a home. It’s ironic that when the first Millennials were born, their Baby Boomer parents couldn’t afford a home either. Looking back to October 1981, interest rates on a 30-year, fixed-rate mortgage exceeded 18%. It wasn’t until rates fell below 10% in 1986, and to the 7% range in the early 2000s, that affordability ceased to be a major impediment to homeownership. Today, California’s housing affordability problem is back – only this time it is fueled by rising home prices and lack of access to capital rather than double-digit interest rates. On Nov. 14, the California Association of Realtors will convene economists, policymakers, and practitioners for “The Real Estate Summit: Partnering for Change in
California.” The summit will explore the issue of housing affordability, as well as California’s infrastructure, foreign investment, consumer trends, housing finance, and policy implications. So how serious is the problem? CAR’s Housing Affordability Index – which tracks the percentage of households that can afford a medianpriced, single-family detached home assuming current interest rates and 20% down – fell from 33% in the first quarter of 2014 to 30% in the second quarter, a 26% decline from a peak of 56% in early 2012. While home buyers needed to earn an annual income of $56,320 to purchase the medianpriced house two years ago, today they need an additional $37,270, or $93,590 total annually, to qualify. The reasons behind the decline in affordability are many: slower-thanexpected economic growth, incomes that haven’t kept pace with rising home prices or rents, pent-up demand, lack of supply, tighter lending criteria in response to new mortgage regulations from Congress, and indecision about the future of Fannie Mae and Freddie Mac, to name a few. What the numbers don’t reveal is the impact the problem is having on individuals and families. Nationally, more than half of adults surveyed say they’ve taken a second job, postponed retirement contributions, run up credit cards, or moved to a cheaper neighborhood in order to cover their
rent or mortgage over the past three years, according to the MacArthur Foundation. Another study reports that 45% of collegeeducated Millennials have moved back in with their parents because they can’t find a job or the one they have doesn’t cover student loans and a place to live. A lack of new home construction is likely to cause further affordability issues unless housing starts increase in line with local job gains, according to the National Association of Realtors. Its analysis found that too few homes are being constructed in relation to local job market conditions, and that lack of construction has “hamstrung” supply and slowed home sales. Here in California, it has been estimated that the post-recovery real estate market could easily absorb 250,000 new units of owner-occupied or rental housing – a need that isn’t even close to being fulfilled. What's the key reason?
Many small builders continue to experience limited access to credit and rising construction costs. Despite strong demand, the number of singlefamily housing permits issued in August 2014 declined by nearly 21% from the same month in 2013, while the number of multifamily permits was down almost 24% year over year. There are some who believe California’s housing affordability problem will work itself out as the economy improves and consumer expectations align with real estate market realities. They may be right. The question is: What will be the ultimate cost of such inaction, both now and over the long term? By Joel Singer, CEO California Association of Realtors as reported on Hardwire.com
Suddenly, The New Home Sales Trend is Flat Again New home sales increased only slightly in September, up 0.2 percent over August, bringing the annual rate of those sales to 467,000. Sales were up 17.0 percent from the September 2013 pace of 399,000 units. Perhaps bigger news in today's joint release from the Census Bureau and the Department of Housing and Urban Development was the revision to the August new home sales number. The initial report of those sales indicated a very significant 18 percent increase over July's number, sending sales to a seasonally adjusted annual rate of 504,000 and over the half-million mark for the first time since May 2008. The estimate was well over analysts' expectations; the consensus had been 430,000 units. Turns out the analysts were closer to the mark than the government agencies which today downgraded the August estimate to an annual rate of 466,000. This takes what had been a potential trend of improvement back into the stagnant sub-500k range that's been intact throughout the post-crisis period.
At the end of September there were an estimated 207,000 new homes available for sale, a 5.3 month supply at the current absorption rate. This is up from 183,000 available homes one year earlier which was at that time a 5.5 month supply.
On a non-adjusted basis there were an estimated 38,000 new homes sold in September, unchanged from the previous month and 7,000 more than a year earlier. A house sold during the month was on the market a median of 3.1 months. At the end of September there were an estimated 207,000 new homes available for sale, a 5.3 month supply at the current absorption rate. This is up from 183,000 available homes one year
earlier which was at that time a 5.5 month supply. The median price of a new home sold in September was $259,000 and the average sale price was $313,200. In September 2013 the median and average sale prices were $269,800 and $321,400 respectively. New home sales in the Northeast region were unchanged from August at a seasonal rate of 30,000 units but that was an increase of 20.0 percent from
September 2013. The Midwest had a 12.3 percent month-over-month increase and sales were 6.7 percent above a year ago with an annual estimate of 64,000 units. In the South annual sales were at a 261,000 unit pace, up 2.0 percent for the month and 18.6 percent on an annual basis. The West saw an 8.9 percent drop in new home sales in September but the rate remained 19.1 percent higher than the same month in