“Numerology” is a concept that attempts to uncover truths in various economic and real estate trends.
Attention: California’s housing market is currently stagnant, with home sales reaching near-record lows due to the average buyer’s monthly house payment soaring to a new high of $4,332.
Source: I analyzed the June homebuying report for existing single-family houses, published by the California Association of Realtors, using my reliable spreadsheet. I took into account 33 years of historical data for a comprehensive perspective.
Intriguing conundrum: How can prices be increasing when there are fewer buyers? Is it simply unaffordable for most due to high mortgage rates and prices?
Key Takeaways
Just how dire is the situation? June witnessed the 20th slowest pace of homebuying since the 1990s, ranking among the bottom 5%.
Although there has been a 15% increase in annual sales volume over the past six months, indicating a modest resurgence in springtime house hunting, overall purchases have declined by 20% in the past year and 34% since February 2020, the month before the pandemic swept the globe.
To put things into historical perspective, sales have slumped by 32% compared to the 33-year average of 409,000 homes sold annually. The sluggishness in homebuying has only been surpassed by select months in the early 1990s, during the market crash of 2007-08, and in the initial period of the pandemic.
Further Analysis
Let me simplify it for you: homes in California are simply too expensive.
The lethargic sales coincide with a median home price of $838,260 in June, ranking as the sixth highest in Realtor records. Although this price benchmark has surged by 8% in six months during a recent upswing, it has experienced a 2% decline over the past year following a market decline in late 2022.
However, throughout the pandemic era, this California price benchmark has skyrocketed by 45%.
The main culprit is the surge in mortgage rates, which have risen significantly from their record lows in 2021 as the Federal Reserve attempts to address the cost-of-living challenges posed by an overheated economy.
In June, 30-year mortgage rates averaged 6.71%, according to Freddie Mac. This represents a 0.35 percentage point increase over the past six months, a 1.2 point increase over the past year, and a staggering 3.2 point increase compared to February 2020.
Need I mention that mortgage rates have averaged 5.96% since 1990? Or that they bottomed out at 2.7% at the end of 2020?
Now, consider the consequences of rising rates on a potential homebuyer’s purchasing power.
For every $1,000 borrowed, homebuyers in June were afforded a loan of $154,813. This represents a 4% decrease in loan size over six months, a 12% decrease over the year, and a 31% decrease compared to February 2020. Additionally, it is 10% below the 33-year average purchasing power.
Buyers in this challenging market must possess substantial financial resources. Reflect on how rising rates and home prices have inflated house payments substantially.
A median-price homebuyer with a 20% down payment in June faced a monthly payment of $4,332, the highest on record since at least 1990.
This monthly cost has increased by 11% in the past year. Even more concerning is the fact that house payments have surged by a staggering 109% during the pandemic era, more than doubling in value.
Therefore, a Californian needed an annual income of $188,400 to afford a home in the first quarter, marking a 19% increase over the past year, according to the Realtors’ affordability index.
Considerations
Some real estate experts may argue that the limited number of homes available for sale is the primary reason for the slump in sales, stating, “You can’t sell what you don’t have,” or similar sentiments.
Indeed, statewide inventory only constituted 2.2 months of sales in June, according to Realtors. This figure has only been lower 9% of the time since 1990. Supply has declined by 8% over the past year, plummeted by 39% during the pandemic era, and currently stands at 62% below the 33-year average of 5.7 months.
What explains this scarcity? Typically, many sellers are homeowners who intend to purchase another property. However, the “move-up market” is virtually non-existent.
Why is this the case? Few homeowners can afford to buy in the current market with exorbitant prices and rates. Alternatively, they may be unwilling to give up their low mortgage rates. The median rate for an existing home loan is 3.5% nationwide.
In my opinion, homeowners staying put is not a significant problem, aside from the reduced number of transactions. It impacts both supply and demand.
In conclusion
It is crucial not to underestimate the role of jobs, a factor that often goes unmentioned when evaluating the state of California’s housing market, even during this sluggish period.
The job market in the state is thriving, and the steady influx of paychecks can create new opportunities for potential homebuyers. As of June, unemployment stood at 4.6%. It has only been lower 11% of the time in the past 33 years.
Currently, there is a slight cooling in hiring activity this summer across the state and nation, which aligns with the Federal Reserve’s efforts to combat inflation.
Unemployment in California has risen by 0.7 percentage points in the past year, causing some economic uncertainties that impede the house hunting process. Nonetheless, it is essential to acknowledge that the situation for workers remains favorable, as the average unemployment rate since 1990 has been 7.1%, which is 2.5 points higher than the current rate of unemployment.
Remember the three crucial factors in real estate: Jobs. Jobs. And jobs.
Jonathan Lansner is the business columnist for the Southern California News Group. You can contact him at [email protected].
