According to the National Association of Realtors, it’s almost as hard to afford a house today as it was back before the financial crisis started to hit in 2008. But is that good or bad for the economy? Well, maybe a little of both. As the housing market has recovered, prices are on the rise. That’s generally seen as a positive sign. At the same time, mortgage rates have risen dramatically over the past year.
However, median household income hasn’t risen as quickly. At the end of this report I’ve attached some of the most recent data from both our state and national associations summarizing the impact of rising prices and interest rates on housing affordability. These Affordability Indices are based on median household income, home prices, and interest rates.
The impact of these confluences is also detailed in recent articles from the Washington Post; ‘Buying a House is Harder Than It’s Been for Five Years’, and the Wall Street Journal; ‘Mortgage Lenders, Homebuyers Feeling Rate Squeeze’.
As I’ve reported here in the past, this housing ‘recovery’ is of recent vintage and is extremely fragile. Concerns about federal policy regarding mortgage interest deductions for homeowners, the proposed dissolution of Fannie & Freddie, continuing high unemployment (or underemployment) and the end of the Fed buyback of $85 billion worth of bonds every month has investors, lenders and homebuyers feeling very insecure. And insecurity and uncertainty are not friends of the housing market – or the economy in general.
Keep in mind that as a result of the 5 year recession and the massive wave of distressed properties, nearly 60% of potential home re-purchasers have been eliminated from the market for the next 3 – 5 years. That’s an unprecedented number that has caused the rate of homeownership to fall to its lowest rate in 18 years. We’re also seeing a pull-back by investors as the bargains they seek have gone away. Add to that the fact that for every 1% increase in interest rates we lose another 4-5 million prospective home buyers, especially first timers, and you can see how the recent surge in sales fueled largely by investors and first time homebuyers may have assuaged some of that pent-up demand and now we’re entering a different phase of the recovery.
We’re seeing that borne out locally as sales numbers decline even as prices continue to rise. After a 2% dip in July, median price for Southwest California rose 4% in August keeping us 24% ahead of last August. Year-to-date median price is averaging a 19% gain over last year. That’s healthy but not rampant and with the increase in inventory, should continue to moderate through year-end.
Sales dropped 13% month-over-month and are currently running 6% behind the year-over-year run rate. Historically the next few months should continue to see slower sales activity which will also decrease pressure on pricing. At the current run rate, 2013 will end up about the same level of sales as 2011 (7,596), which wasn’t bad. Standard sales accounted for 90% of the active listings on the market again in August and nearly 80% of sold properties.
I agree with the conclusions reached by our state association in the newsletter attached at the end of this report which suggests that none of these changes to the housing market in California indicates that the recovery is in jeopardy. On the contrary, real estate markets are moving into a state of a more measured and sustainable housing recovery in which traditional buyers and sellers will play a greater role. Of course we still have the government to worry about…
Gene Wunderlich is the Government Affairs Director for Southwest Riverside County Association of Realtors. If you have questions on the market please contact me at GAD@srcar.org or to keep up with the latest legislative and real estate trends go to http://gadblog.srcar.org/