Tag Archives: Home Affordability

Crisis Level: California’s Housing Affordability Plummets To 10-Year Low

California’s housing affordability crisis is progressively getting worse. It has now plummeted to its lowest level in 10-years, and less than one in five households can afford to purchase a median-priced single-family home in the Bay Area, according to new data released by the California Association of Realtors (CAR).

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CAR released its second-quarter Housing Affordability Index report (HAI), based on the percentage of all households that can afford to purchase a median-priced, single-family home in the state. CAR also reports affordability indices for regions and counties within the state. The index is regarded as the most fundamental benchmark of housing well-being for home buyers.

The percentage of home buyers who could afford to buy a median-priced, existing single-family home in the state declined from 31 percent in the first quarter to 26 in the second quarter; in the previous year, the index was at 29 percent, according to CAR’s HAI.

The second quarter marked the 21st consecutive quarter that CAR’s HAI printed below 40 percent; the index topped at 56 percent in the first quarter of 2012.

The report showed that prospective home buyers would need to have minimum annual income of $126,500 to prequalify for the purchase of a $596,730 statewide median-priced, existing single-family home in the second quarter. Assuming a 20 percent down payment and an effective composite interest rate of 4.70 percent, the monthly payments of a 30-year fixed-rate loan would be around $3,160.

The California counties that recorded 10-year lows in housing affordability were Alameda, Merced, Orange, Riverside, Sacramento, San Bernardino, San Diego, San Mateo, Santa Clara, Santa Cruz, and Sonoma.

Here are the areas where housing affordability is at crisis levels: Santa Cruz (12 percent), San Francisco, San Mateo, and Mono (all at 14 percent), and Alameda and Santa Clara (both at 16 percent).

According to CAR’s index, the most affordable counties in California during the second quarter were Lassen (64 percent), Kern (53 percent), Madera (52 percent), Tehama (51 percent) and Kings (50 percent).

Housing Affordability Peaked At 1Q 2012 

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Housing Affordability — Traditional Index 

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Affordability Peak vs. Current 

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In a separate, but relevant report from CAR, data shows California’s real estate market could have already peaked.

California Home Sales Declined for the 1 st Time in 4 Months

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Sales Lost Momentum as Mortgage Rates Continued to Climb

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California is one of the largest housing markets in the nation, as it has been a forward leading indicator for the rest of the country. Amid a housing shortage, which has blossomed into a housing affordability crisis, sales this summer have started to tumble, even as more inventory comes online. The supply of homes for sale increased annually in June for the first time in three years, according to the National Association of Realtors, which has depressed sales for the third straight month.

And now it seems, California’s real estate market could be in the beginning stages of a correction to fair value, after nearly a decade of speculation forced much of the median-priced single-family homes out of reach of the middle class – contributing to the housing affordability index at a 10-year low.

Source: ZeroHedge

 

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Seasoned Silicon Valley Techies Struggle On Six-Figure Salaries

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Several Silicon Valley employees, including a software engineer for Twitter who made a $160,000 salary, were mocked online after complaining about their living standards in an article for The Guardian.

In the article, entitled “Scraping by on six figures? Tech workers feel poor in Silicon Valley’s wealth bubble,” the employee complained that his six-figure salary was “pretty bad” for the area.

“I didn’t become a software engineer just to make ends meet,” proclaimed the employee“Families are priced out of the market.”

“The biggest cost is his $3,000 rent – which he said is ‘ultra cheap’ for the area – for a two-bedroom house in San Francisco, where he lives with his wife and two children,” reported The Guardian sympathetically. “He’d like a slightly bigger place, but finds himself competing with groups of twenty somethings happy to share accommodation while paying up to $2,000 for a single room.”

“Prohibitive costs have displaced teachers, city workers, firefighters and other members of the middle class, not to mention low-income residents,” they continued. “Now techies, many of whom are among the highest 1% of earners, are complaining they, too, are being priced out.”

The Guardian also covered other Silicon Valley employees in the piece who were earning “between $100,000 and $700,000 a year” but still allegedly had trouble “making ends meet.”

“One Apple employee was recently living in a Santa Cruz garage, using a compost bucket as a toilet. Another tech worker, enrolled in a coding boot camp, described how he lived with 12 other engineers in a two-bedroom apartment rented via Airbnb,” The Guardian reported.

“It was $1,100 for a fucking bunk bed and five people in the same room. One guy was living in a closet, paying $1,400 for a ‘private room,’” one man complained, while a female employee added, “We make over $1m between us, but we can’t afford a house… This is part of where the American dream is not working out here.”

Other established San Francisco residents mocked tech employees for their complaints.

“Scraping by in the Bay Area on a six-figure salary sure must be difficult!joked San Francisco Chronicle reporter Lizzie Johnson.

Source: By Charlie Nash | Breitbart

WSJ Sounds The Alarm: “There’s No Getting Over” Gas at $4 a Gallon

Consumers, who are already being squeezed by rising interest rates (even as the return on their cash deposits remains anchored near zero), are facing another potential constraint on their already limited purchasing power. And that constraint is  rising gasoline prices, which, as we pointed out last month, could erode the stimulative impact of President Trump’s tax plan as rising prices sop up what little money the middle class is saving.

As prices rise and banks scramble to update their forecasts, the Wall Street Journal has become the latest publication to sound the alarm over what is, in our view, one of the biggest threats facing the US economy in the ninth year of its post-crisis expansion. 

In its story warning about $3 a gallon gas (of course, we’re already seeing $4 a gallon in parts of California and other high-tax states), WSJ cited Morgan Stanley’s latest projection that rising gas prices could wipe out about a third of the annual take-home pay generated by the tax cuts.

Rising fuel costs can also feed inflation and pressure interest rates. Even though the Federal Reserve typically looks past volatile energy prices in the short term, higher energy costs help shape consumer confidence. And with the central bank poised to be more active this year, rising energy costs pose an additional risk to the economy.

Morgan Stanley estimates that if gas averages $2.96 this year, it would take an annualized $38 billion from spending elsewhere, an upward revision from the bank’s $20 billion estimate in January. That would wipe out about a third of the additional take-home pay coming from tax cuts this year, the analysts said.

Patrick DeHaan, petroleum analyst at GasBuddy”Three dollars is like a small fence. You can get through it, you can get over it,” said Patrick DeHaan, petroleum analyst at GasBuddy, a fuel-tracking app. “But $4 is like the electric fence in Jurassic Park. There’s no getting over that.”

Of course, MS’s take appears downright pollyannaish when compared with a Brookings Center report that we highlighted last month.

The left-of-center think tank, which of course has every reason to hope that the next recession will materialize on President Trump’s watch, projected that consumers would soon spend about half of the money saved from tax cuts on fuel costs.

And in a report published in April, Deutsche Bank illustrated how rising fuel costs will disproportionately squeeze the most vulnerable among us – a cohort of consumers who already shoulder an outsize share of the country’s household debt.

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The FT put it another way…

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As the chart above shows, middle-income families – aka the engine of consumption – will be the hardest hit by rising gas prices.

Indeed, small business owners in California, where gas prices are the fifth highest in the nation thanks to taxes and stringent emissions standards, say they’ve seen their energy bills shoot higher in the past few months. Car salesmen say consumers are asking more questions about mileage, according to WSJ.

Robert Lozano, a car salesman in Los Angeles where some gas prices are already above $4, said the dealership’s gas bill has climbed from about $9,000 to about $12,000 a month recently.

Customers are inquiring more about electric vehicles, he said.

“It’s more in the consumer’s mind as to what the most efficient vehicle is.”

With oil already at $70 a barrel, early indicators imply that the summer driving season could see an unusually large spike in demand for gas…

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…As the number of Americans intending to take vacations in the next six months climbs to its highest level in decades.

Heightened vacation intentions suggest the number of vehicle miles driven will also climb (because people tend to travel greater distances when they go on vacation). As the chart below shows, fluctuations in miles driven – a close proxy for gas demand – are quickly reflected in prices at the pump.

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While the US’s increasing prominence in the oil-export market could soften some of the economic blow as the energy business booms, other large business from airlines to shipping companies would feel the pinch at a time when costs are already rising.

But some economists say the growing importance of energy to the U.S. economy could blunt some of the impact from rising oil prices.

The country has become a more prominent supplier of crude oil and fuel. Domestic production has reached record weekly levels of 10.7 million barrels per day and a lot of it is being exported.

[…]

“People don’t understand how we could double crude oil production” and see higher gas prices, said Tom Kloza, global head of energy analysis at the Oil Price Information Service. “The answer lies in the balance of payment. We are an exporting power right now.”

[…]

Airlines and shipping companies will also be paying more for jet fuel and diesel – costs that may be passed along to consumers. Even companies such as Whirlpool Corp. have noted that higher oil prices have boosted the cost of materials.

Refiner Valero Energy Corp. said it wouldn’t expect consumer demand to drop off until oil prices are at $80 to $100.

But demand is only one factor driving up oil prices. Supply issues have also weighed on oil traders’ minds. Traders pushed oil prices higher as the US pulled out of the Iran deal as some worried that it could impact global supplies (though, as we’ve pointed out, there are plenty of other buyers waiting to step in and buy Iranian crude). Even if the Iranian crude trade isn’t impacted by sanctions, plummeting production capacity in Venezuela could ultimately have a bigger impact on global supply.

Conflicts in other oil producing regions could also impact supplies, pushing prices higher.

Last week, Bank of America became the first Wall Street bank to call $100/bbl for Brent crude (at the time, it was trading around $77/bbl) in 2019. That could send prices to highs not seen since 2008. Other banks have been scrambling to raise their forecasts as well. 

With the Fed changing its language in its latest policy statement to reflect rising inflation expectations, rising oil prices could also inspire the Fed to hike interest rates more quickly for fear that the economy might overheat. That could result in four – or perhaps five – rate hikes this year.

The resulting effect would be like economic kudzu strangling the buying power of consumers and possibly forcing a long-overdue debt reckoning as millennials, who are already drowning in debt, are forced to put off home ownership and family formation until they’re in their late 30s or even their 40s.

Source: ZeroHedge

No Relief In Sight: Housing affordability is weakening at the fastest pace in a quarter century

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  • Rising home prices, rising mortgage rates and rising demand are colliding with a critical shortage of homes for sale. And all of that is slamming housing affordability.
  • This year, affordability — based on the amount of the monthly mortgage payment will weaken at the fastest pace in a quarter century, according to researchers at Arch Mortgage Insurance.
  • Other studies that factor in median income also show decreasing affordability because home prices are rising far faster than income growth.

It is the perfect storm: Rising home prices, rising mortgage rates and rising demand are colliding with a critical shortage of homes for sale.

And all of that is slamming housing affordability, which is causing more of today’s buyers to overstretch their budgets. This year, affordability — a metric based solely on the amount of the monthly mortgage payment — will weaken at the fastest pace in a quarter century, according to researchers at Arch Mortgage Insurance.

The average mortgage payment, based on the median-priced home, increased by 5 percent in the first quarter of 2018 nationally and could go up another 10 to 15 percent by the end of the year, according to their report.

Researchers looked at the median-priced home, now $250,000, and estimated price gains this year of 5 percent in addition to mortgage rates going from 4 percent to 5 percent on the 30-year fixed. Other studies that factor in median income also show decreasing affordability because home prices are rising far faster than income growth.

That is a national picture – but all real estate is local, and some markets will see affordability weaken more dramatically. The average monthly payment in Tacoma, Washington, is estimated to increase 25 percent this year, given sharply rising prices. In Baltimore and Boston, it could rise 21 percent in each. Philadelphia, Detroit and Las Vegas could all see 20 percent increases in the average monthly payment.

“If mortgage rates and home prices continue to rise as expected, affordability will get hammered by year-end as demand continues to outstrip supply,” said Ralph DeFranco, global chief economist-mortgage services at Arch Capital Services. “A strong U.S. economy combined with a housing shortage in many markets means that there is little hope of any price drop for buyers. Whether someone is looking to upgrade or purchase their first home, the window to buy before rates jump again is probably closing fast.”

Barely a decade after home values crashed especially, they are now hovering near their historical peak, accounting for inflation. Prices are being driven by record low inventory of homes for sale. Home builders are still producing well below historical norms, and demand for housing is very hot. The economy is stronger, which is giving younger buyers the incentive and the means to buy homes.

Stretching budgets and pushing limits

Maryland real estate agent Theresa Taylor said the supply shortage is hitting buyers hard. She is seeing more clients stretch their budgets to win a deal amid multiple offers.

“People are having to escalate offers on top of rates going up. I’m seeing it in all price ranges,” said Taylor, an agent at Keller Williams. “I am seeing it when I’m getting five offers, and people are trying to package up an offer where they’re pushing their limits.”

Buyers are taking on much higher debt levels today to be able to afford a home. In fact, the share of mortgage borrowers with more than 45 percent of their monthly gross income going to debt payments more than tripled in the second half of last year. Part of that was because Fannie Mae raised that debt-to-income threshold to 50 percent, but clearly there was demand waiting.

“Family income is rising more slowly than home prices and mortgage rates, meaning that the mortgage payment takes a bigger bite out of income for new home buyers,” said Frank Martell, president and CEO of CoreLogic. “CoreLogic’s Market Conditions Indicator has identified nearly one-half of the 50 largest metropolitan areas as overvalued. Often buyers are lulled into thinking these high-priced markets will continue, but we find that overvalued markets will tend to have a slowdown in price growth.”

CoreLogic considers a market overvalued when home prices are at least 10 percent higher than the long-term, sustainable level. High demand makes the likelihood of a national home price decline very slim, but certain markets could see prices cool if supply grows or if there is a hit to the local economy and local employment.

In any case, the more home buyers stretch, the more house-poor they become, and the less money they have to spend in the rest of the economy.

With no relief in either inventory or home price appreciation in sight, the housing market is likely to become even more competitive this year.

At some point, however, there will come a breaking point when sales slow, which is already beginning to happen in some cities. Home prices usually lag sales, so if history holds true, price gains should start to ease next year.

(video interview)

Source: By Diana Olick | CNBC