- How much longer can home prices continue to rise? We are going to look at the Housing Affordability Index by the California Association of Realtors for California, Orange County, and Los Angeles County. Most people I talk to are shocked to learn that despite record high home values, purchasing a home is still more affordable today than it was at the last peak. Today’s level of affordability is similar to what we experienced in roughly late 2003. Home prices continued to rise for 3 more years before the housing market crashed. I’m Tim Hamilton with StellarQuest Real Estate and I am going to walk you through all the numbers. If you enjoy watching I would really appreciate it if you liked this video by hitting the thumbs up button and subscribe to our channel if you want to stay up to date on the housing market.
- In this video we’re going to look at the past to try and compare it to where we are today. I am in no way trying to predict the future of the housing market, I’ll leave that to the economists and pundits. I am just analyzing one perspective of current home prices and home affordability that I find very interesting. After we go through the numbers, I will talk about some of the factors that are different this time around, which could cause a different result.
- For those of you who don’t know, the housing affordability index is an attempt to calculate the percentage of a population that can afford to purchase the median priced home assuming they have a 20% down payment. If you want to learn about the formula that is used to calculate this number, please let me know and I can send that to you. Before we get started I wanted to give you the back story on the index leading up to the Great Recession. It reached a peak in about 1994 and began slowly dropping from that point through 2007, which is about when the housing market crashed. As home prices and interest rates dropped, it rose to another peak in about 2012 and has been steadily declining since as home prices rose to new record highs. Despite record high home values, the housing affordability index is still notably above the lows it reached during the last peak. Now let’s look at the numbers.
- Housing Affordability Index Comparison
- California:
- Q3 2021: 24%
- August 2003: 24%. Dropped to about 19% in May 2004, then started to slowly drop to a low of 11% in the second and third quarter of 2007.
- There was about 3 years of appreciation after HAI reached a similar level to what it was in Q3 of 2021.
- Orange County:
- Q3 2021: 18%
- August – December 2003: 18%
- May 2004 – 11%
- It stayed at roughly 11% between May 2004 – Q3 of 2007. The lowest point it dropped to was 10%.
- There was 3 years of additional appreciation after HAI reached 18% leading up to the last crash. The HAI was able to drop to a low of 10% while home values continued to increase.
- Los Angeles County:
- Q3 2021: 19%
- April 2004: 20%
- Dropped to a low of 9% in Q3 2006 and stayed around that level until Q3 of 2007.
- California:
- Differences:
- No more liar loans – today’s buyers have gone through a more stringent qualification process. Good: buyers are more qualified and less likely to become a foreclosure. Bad: this could have created extra demand which doesn’t show in the affordability index numbers due to liar loans which continued to drive prices up.
- Bad: With higher nominal prices, affordability will be more susceptible if interest rates rise.
- There are a lot less homes for sale today compared to the years leading up to the Great Recession.
- There is a strong wave of first-time homebuyers coming into the market as millennials are reaching prime first-time home buyer age.
StellarQuest Real Estate – Lic. # 02077900
Tim Hamilton
Broker Associate – Realtor®
Lic. #01959966
(714) 486-4086
timsellsca@gmail.com
www.StellarQuest.com