Affordability and Availability Stymie Southern California Market

Consumers, CEOs vaguely more optimistic about the economy, but home prices remain stubbornly high
Published on Feb 14, 2024

Affordability and availability continue to be the key words in the Southern California housing market, and will likely remain a challenge for many homebuyers in 2024, according to a recent report from the California Association of Realtors (CAR).

Interest rates could also continue to drop,  but inflation is slowing at a far slower pace than expected, the report noted.

According to the Associated Press, Tuesday’s report from the Labor Department showed that the consumer price index rose 0.3% from December to January, up from a 0.2% increase the previous month. Compared with a year ago, prices are still up 3.1%, which is less than the 3.4% figure in December and far below the 9.1% inflation peak in mid-2022.

But the latest reading is still well above the Federal Reserve’s 2% target level, said AP.

The overall numbers suggest that consumers are beginning to feel more positive about the current housing market conditions, and those on the sidelines could reenter the market if the economy remains healthy and rates continue their downward trend, said the CAR report.

Both sales and listings have been slowly improving since the end of 2023, said CAR,  who added that should the market momentum continue, the California housing market could see an encouraging start for 2024.

But Housing affordability in California continued to be a sticking point in the last quarter of 2023, said CAR, with the statewide index for existing single-family homes remaining unchanged from the previous quarter at 15%.

Stubbornly high California housing prices, along with higher mortgage rates, pushed the costs of borrowing up at the end of 2023, keeping California affordability at the lowest level in 16 years for the second consecutive quarter.

According to CAR numbers, the monthly mortgage payment for a median-priced home—including taxes and insurance—inched up 0.7% from the third quarter of 2023, and jumped 11.2% from the fourth quarter of 2022, as the effective mortgage rate moved up 25 basis points (bps) quarter-to-quarter and increased 59 bps from a year ago, to a 23-year high of 7.39% in the fourth quarter of 2023.

According to CAR figures, a minimum annual income of $222,800 was required to make a monthly payment of $5,570 in the fourth quarter of 2023. Home prices are still expected to rise in 2024, meaning that affordability will remain low but could improve slightly, if rates dip significantly in the next 12 months, said CAR.

Meanwhile, the latest Home Purchase Sentiment figures released by Fannie Mae rose again in January 2024, with the index increasing 3.5 points to 70.7 in the latest monthly read, the highest point since March 2022.

This, said CAR, was due partly to the increase in consumer confidence in job security as well as a jump in the share of consumers who expected mortgage rates to decrease in the short term.

The number of respondents expecting mortgage rates to go down in the next 12 months, actually reached an all-time high of 36% in January, said the CAr report.

Despite this optimism, consumer perception on home buying remained pessimistic, said the report, and the number of those who believed that it is a good time to buy, stayed low at 17%, unchanged from the prior month.

With affordability expected to improve slightly but remain low in coming quarters, home purchase sentiment could inch up in 2024 but the increase will be mild.

At the same time, according to the latest New York Fed’s Survey of Consumer Expectations,  Consumers’ expectations on inflation a year from now were mostly unchanged in January.

At the one-year horizon, the CAR report noted, the median inflation expectation recorded a 3% in January, same as December 2023, but still a sharp drop from 5% registered in January 2023.

Two out of five (41.3%) of the respondents expected inflation to rise above 4% a year from now, while one out of four (24.5%) believed inflation should be between 2% to 4% in a year, said the report, and one out of three (34.1%) projected inflation to be below 2% a year out.

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