The most recent range County Housing Report stated the market has rapidly slowed since May of 2018 and the demand reading is the lowest for this time of year since 2007. What did the report not say is what has caused this change?

Housing Affordability is at its Lowest

The fact that U.S. housing affordability has now hit a 10 year low in the second-quarter 2018 is a major concern to the marketplace.

The California Association of Realtors recently reported the percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California in the second-quarter 2018 fell to 26 percent from 31 percent in the first-quarter of 2018. California’s housing affordability index hit a peak of 56 percent in the second-quarter of 2012. The previous low where home prices were at the least affordable was third-quarter of 2008.

A minimum annual income of $126,490 was needed to qualify for the purchase of a $596,730 statewide median-priced, existing single-family home in the second-quarter of 2018. The monthly payment, including taxes and insurance on a 30 year fixed rate loan, would be $3,160, assuming a 20 percent down payment and an effective composite interest rate of 4.70 percent.

A Challenge for Orange County

Now, compare this to Orange County where the percentage of buyers who could afford to purchase the $830,000 median-priced home fell to 20 percent in the second-quarter of 2018. Put another way, 80 percent of buyers cannot afford to buy a median-priced home in Orange County. The minimal annual income of $175,930 is needed to afford the $4,400 total payment.

Home prices have risen faster than wages. Since bottoming out in the first-quarter of 2012, median home prices nationwide have increased 75 percent while average weekly wages have increased 13 percent during the same period. Interest rates have increased by one percent from 2016 to 2018. This equates to another 10 percent increase to the value of homes when used as a cost comparison.

What is the Potential Outcome?

If wages were to begin increasing quickly then the Federal Reserve would increase interest rates more to offset future inflation concerns. We will continue to see the demand reading remain low for an extended period of time unless the most likely historical outcome takes place which is a decrease of home values.