California Home Affordability Slipping Away in Q1

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According to the California Association of Realtors ('C.A.R.'), the combination of continued price increases and relatively higher interest rates during the first quarter of 2014 led to decreased housing affordability in all regions of California.

While the percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California rose slightly from 32 percent in the fourth quarter of 2013 to 33 percent in the first quarter of 2014, affordability declined sharply from the 44 percent rate reported in the first quarter of 2013, according to C.A.R.'s Traditional Housing Affordability Index (HAI).

C.A.R.'s HAI measures the percentage of all households that can afford to purchase a median-priced, single-family home in California.  C.A.R. also reports affordability indices for regions and select counties within the state.  The Index is considered the most fundamental measure of housing well-being for home buyers in the state.

Home buyers needed to earn a minimum annual income of $86,419 to qualify for the purchase of a $416,720 statewide median-priced, existing single-family home in the first quarter of 2014.  The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $2,160, assuming a 20 percent down payment and an effective composite interest rate of 4.46 percent.  The effective composite interest rate in fourth-quarter 2013 was 4.43 percent and 3.56 percent in the first quarter of 2013.

The median home price was $431,540 in fourth quarter 2013, and an annual income of $89,247 was needed to purchase a home at that price.
 
Highlights from C.A.R.'s fourth quarter HAI include:

• California's housing affordability has dropped 23 percent since its peak in the first quarter of 2012, and has steadily declined since then as rising interest rates and increasing home prices contributed to the lack of affordability.

• Approximately 77 percent of the counties reviewed by C.A.R. experienced a quarter-over-quarter decline in affordability, and all counties realized a double-digit decline in year-over-year comparisons.

• The largest year-to-year declines in affordability were in Monterey County (-20 percent), Sonoma County (-14 percent), Ventura County (-13 percent), and Solano County (-13 percent).

• During the first quarter of 2014, the three most affordable counties were Madera County (65 percent), San Bernardino County (63 percent), and Kings County (62 percent).

• The least affordable counties in California included San Mateo County (12 percent), San Francisco County (14 percent), Santa Barbara County (16 percent), and Marin County (16 percent).

• The Bay Area tops the list of least affordable markets while affordability in the Inland Empire still ranks relatively higher. Nevertheless, both regions saw a 22 percentage point drop in affordability since their peaks in first quarter 2012. By comparison, national affordability only declined by 12 percentage points since affordability peaked in first quarter 2012.

• With home prices increasing by double-digits throughout 2013 and interest rates significantly higher than those observed in early 2013, both monthly PITI and the minimum annual income required to purchase a home rose by more than 50 percent at the state level since first quarter 2012.  The top three counties that increased the most in minimum income required to purchase a median-priced home were Santa Barbara, San Mateo, and Monterey.

• Inland Empire and the Bay Area experienced even larger increases in PITI since the affordability peaked.

• The three counties that increased the least in minimum income required to purchase a median-priced home were Contra Costa, Kings, and San Luis Obispo.