October Analytics: Bay Area Update

Welcome to our October newsletter. This month, we’ll help you make informed decisions about real estate by looking at what drives housing affordability and how it impacts both buyers and sellers. We’ll examine:

  • A Recent History of California’s Housing Affordability
  • Housing Affordability in the Greater Bay Area
  • A Winning Buying and Selling Strategy
  • Key Takeaways

A Recent History of California’s Housing Affordability

In a balanced housing market, 50% of residents can afford to buy a median-priced home. Across California, however, housing affordability has rarely reached equilibrium. Even during the recessionary years, from 2009 to 2012, housing affordability briefly hovered around 50% before falling again. The chart below, based on data through August 2019, shows that housing prices have been rebounding since 2011, and the market is now significantly out of stasis, with just 30% of households able to afford the state’s median-priced home.

This percentage is an improvement compared with 2007 when only 10% of households could afford a median-priced home. However, with more than two-thirds of California residents now priced out of homeownership, affordability remains a key consideration for both buyers and sellers.

Housing Affordability in the Greater Bay Area

In the Greater Bay Area, housing is less affordable than the national average. The chart below compares the monthly payment and minimum qualifying income for a median-priced home at the end of Q2 2019 for the United States, California, and Bay Area counties.

For residents of San Francisco, San Mateo, Santa Clara, and Marin, the monthly payment and minimum qualifying income for a median-priced home are many multiples above the national average. Even in Solano, the most affordable county in the Bay Area, prices are 60% higher than the national average.

Home Prices vs. Household Income

One reason the Bay Area struggles with affordability is that home prices are increasing much faster than incomes. The chart below tracks the growing disparity between home-price appreciation and household income from 2011 to 2017. As we can see, income rises in a fairly linear, predictable fashion, yet housing costs jump relative to income in 2014. As the difference between home prices and income increases, affordability decreases.

Once again, home prices hover around all-time highs.

In counties like San Mateo and San Francisco, which are closest to the tech and economic hub of the Bay, median home prices have surpassed their pre-recession highs. In farther-out counties like Solano, prices are holding slightly below their all-time highs. In all markets, home prices climbed steadily from their recessionary lows until interest rates began to rise in 2018. Since then price appreciation has been muted. Yearly comparisons such as these are important because they remove variations due to seasonality.

In August of this year, prices varied little from the previous year. No Bay Area county saw single-family-home prices vary either above or below 10% from the previous year. Condo prices were a bit more volatile; in Napa and Santa Clara, they fell more than 10%, and condo prices gained 14% in San Mateo. 

To really understand how unaffordable housing in California has become, let’s compare 2012 to 2019. In the first quarter of 2012, housing affordability in the state peaked when 56% of households could afford a median-priced home. We see from the chart that at the end of Q2 2019, affordability in every county has dropped.

In counties that were most impacted by the recession like Alameda, Napa, and Solano, we see the biggest swings and steepest drops in affordability. No county has become more affordable, although some, like Contra Costa, have remained relatively steady.

Monthly Payments and Minimum Income

Now let’s compare the median monthly payment and median minimum-qualifying income during 2012’s peak affordability period with today’s data. In the Bay Area, both numbers have more than doubled over the last seven years. 

Interest Rates and the Broader Market

One small sign of relief for both buyers and sellers is that affordability rose this quarter compared to last because interest rates are near their all-time lows, which helps offset price increases seen during that same period.

The question is, how will an increase in interest rates affect housing affordability?  From the charts below, we can see that interest rates have a dramatic effect on minimum qualifying income and monthly mortgage payments. For example, in the Bay, each half-point interest-rate increase costs potential homeowners $250 in monthly payments.

As a result, sky-high prices push many households to overextend their budgets in order to own a home.

The deputy chief economist for the California Association of Realtors (CAR), Jordan Levine, says: 

“The bottom line of this housing forecast is we don’t really see a big improvement in housing affordability. Low [mortgage rates] do help a little bit.  . . . We’re much less pessimistic than we were nine months ago when rates were higher.”

Let’s look at last month’s key housing indicators in the Bay Area to see what’s happening beyond affordability in the broader market.

As you can see, prices and sales have been stable. Median prices may vary depending on the size of homes sold, but the price-per-square-foot indicates a slight reduction from last year. Sales were down but not unusually so. 

Prices dropped over the last few months, helping to ease the pain of unaffordable prices.

Sales are relatively unchanged as well, down 4% for the greater area. Broken down by county, we see Napa, Sonoma, and Santa Cruz down by double digits from the previous year.

Slower sales last month are having an impact on inventory, especially in counties such as Napa, where sales performed the worst.

With the exception of Napa, inventory levels are still tight by historical standards. Most analysts consider a balanced market to be around a six months supply of housing inventory. In counties with less than three months supply, options are more limited.

Affordability and Strategic Positioning for Buyers and Sellers

Let’s go back to the key question we’re asking this month: How does affordability (or, in this case, the lack of it), affect potential buyers and sellers? 

First, it is important to remember that home prices and mortgage rates have an inverse relationship, so home prices rise when interest rates fall. Conversely, home prices decline when interest rates rise. Total cost, or affordability, often remains consistent.

If interest rates generally have a minimal impact on affordability, what else might be at play? Economic factors, specifically those which influence supply and demand, can affect affordability. One such economic indicator is unemployment, which now hovers near an all-time low.

Another economic factor is new home builds, which have fallen short of demand in California for years. A final factor is household income, which has grown at a slower rate than housing prices. Any significant change to these economic factors will have an impact on affordability. 

On September 26th, the California Association of Realtors shared this forecast:

“The median home price in California likely will increase by 2.5% to $607,900 in 2020, slowing from a projected 4.1% annual gain in 2019. Sales of existing single-family homes probably will gain 0.8% in 2020 to reach 393,500, following a 3.1% drop this year from 2018’s level.”

Many economists agree that there are plenty of indications the economy will be stable for the foreseeable future. For this reason, our key takeaway for this month is that even though California’s housing market faces an ongoing affordability crisis, waiting for ideal housing-market circumstances or greater affordability may not be a sound plan for potential home buyers. For homeowners thinking of selling, the current market conditions make it an excellent time to list.

A Winning Buying and Selling Strategy

To develop a winning buying and selling strategy, we can analyze three key indicators from August: the percentage of list price recorded, the month’s supply, and the number of days on the market. With this information, we can identify whether a housing market is favorable to buyers or sellers.

According to the numbers above, the housing market favors sellers.

First, the average Bay Area home sold for its original list price in August. If we look at the data by county, we see that San Francisco commanded a premium over other parts of the Bay. Buyers and sellers should take note of this when deciding what offer to make or accept.

The supply index for the month is at 2.5 for single-family homes, which means there are 2.5 months of listings on the market given current sales velocity. Most analysts consider a balanced market to be around six months, so the current supply levels are very low.

With this in mind, buyers should be aware they may not find the perfect home because the market doesn’t offer much choice. Instead, they may need to imagine how a potential home will look after giving it some TLC.

Key Takeaways
Bay Area homes have been the least affordable since 2007
Interest rates are near all-time lows, counterbalancing high sales prices
Economic fundamentals remain strong, and CAR predicts prices will remain stable through 2020  
Potential buyers should not wait for ideal housing market circumstances or greater affordability in the short term
Buyers and sellers should expect to negotiate offers in line with the list price, except for San Francisco where homes tend to sell above list price
Homes shouldn’t be priced above comparables since median-home prices are in line with last year’s numbers
Due to low inventory, buyers should think creatively and be willing to consider an “imperfect” home

Understanding the complexities of housing affordability is critical for both buyers and sellers. An experienced agent can provide key insights and guidance for navigating this important aspect of the market. We’re dedicated to helping our clients reach their real estate goals. We encourage you to contact us with questions about the current market or to request a professional evaluation of your home or condo.

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