Is another Southern California housing crash needed to create ‘affordable’ housing?
Are Southern California homes more unaffordable these days? Well, it depends on which yardstick you’re using. If you look at home pricing and incomes since the Great Recession ended, affordability has gotten much worse.
Of course, if we dream of returning to that era, don’t forget that bargain hunters of those days were bold. Buyers had to be willing to act when the economy and real estate markets were shaky. Not to mention, lenders post-recession were reluctant to do business with anyone who didn’t have solid employment and pristine credit history.
It’s no secret that Southern California housing has been expensive for, well, decades. But take a modestly longer-term view, factoring in this era’s historically low mortgage rates, and a typical house payment hasn’t moved much faster than local incomes.
And there’s more competition in the house-hunting field: The region has added 1.18 million new jobs since 2011.
The Associated Press and data tracker CoreLogic have produced new indexes of local housing values and income levels, two key ingredients to measure housing’s affordability. I took that data and tossed into my trusty spreadsheet some mortgage rate trends to see the challenges local house hunters have faced in recent years.
I chose to look at recent conditions vs. those of five, 10 and 15 years ago, loosely marking the beginning of the last boom; the market’s bottom; and it’s rebound to new heights.
Please note that mortgages rates have slid this century. According to the Federal Reserve Board, 30-year fixed-rate loans averaged 4.57% in 2018’s third quarter, the last period CoreLogic measured for its new index. Those rates were up slightly from five years ago when a fixed mortgage ran 4.44%. But in 2008, as the market’s bubble was bursting, rates averaged 6.25%. And in 2003, as the last cycle’s upswing was brewing, the typical mortgage rate was 7.01%.
So, how did that swing play out locally, using the CoreLogic data and my mortgage info?
In the last five years, incomes in Los Angeles and Orange counties rose 16%, nowhere near the 37% gain in typical house payments, according to a mix of CoreLogic’s price index and mortgage movements. In the Inland Empire, 13% bumps in pay were well short of a 41% surge in a buyer’s mortgage payment. Clearly, a house hunter who didn’t act near the bottom is now feeling added financial burdens.
But toss in a historic housing crash that roughly halved home prices and those mortgage rate cuts and the longer-term affordability math changes.
Let’s go back 10 years to the market’s previous price pinnacle. L.A.-O.C. incomes were up 25% in that decade-long period. In the same timeframe, house payments rose by just 21%. In the Inland Empire, a 19% rise in pay compared nicely with a payment increase of 17%.
And since the early days of the last bubble — 2003 — L.A.-O.C. incomes have risen by 50%. That compares to a 56% gain for house payments. Inland Empire workers got 41% better pay, on average, vs. a house payment jump of 29%.
Perspective is essential as the entire state ponders how to best lower the high cost of living here. Please recall a key ingredient in post-recession affordability that has since vanished: Stupid mortgages.
In the last boom, just about anybody who wanted a mortgage could get one. So while affordability was statistically low, buying was kind of easy.
But lenders — and, yes, borrowers — were acting irresponsibly by creating debts that were unlikely to be repaid. The ensuing wave of foreclosures and other distressed sales created affordability in the form of trashed housing values. Add in the declining mortgage rates from the broad economic meltdown and you had, momentarily, relative bargains. These discounts helped many house hunters afford what usually seems like oppressive local housing price tags.
That brings up an ugly truth for Californians as they debate whether the state can build its way out of its pricey housing. Will it take another housing debacle to create affordable housing?